Stocks are on a tear, with the Dow Jones up a thousand points in
two months and advancing in 24 out of 27 sessions during one
stretch, tying an 80-year-old record. This despite the concerns and
anxiety of some of Wall Street’s most seasoned strategists, not to
mention a skeptical public, judging by the net out-flows from
equity mutual funds during April — a month that turned out to be
one of the best for stocks in recent memory. With recent
sluggishness in housing and retail sales, what is to explain this
dramatic climb?
As an analogue consider the sport of stockcar racing. The race
doesn’t always go to the fastest car. Driver skills and tactics are
key and one of the most important tactics is drafting. In
drafting a trail car tucks close behind a lead car greatly reducing
the air resistance it faces. At 150+ mph the aerodynamics of
stockcars are such that drafting actually benefits both cars — the
trail from less air resistance, the lead from less drag as the
trail car displaces the vacuum that is created when a car rockets
through the atmosphere at such high speeds. NASCAR fans will also
point out that drafting, sets up the dramatic slingshot
maneuver, which comes…but enough about racing.
Global economics is a type of race. For most of the past 50
years the U.S. has performed the function of lead car in the world
economy. That was good for the rest of the world, which struggled
to keep pace, but benefited nonetheless from the more powerful and
better performing U.S. economy. Times are different now. For the
past several years the overseas economies have been growing faster
than the U.S. In fact, global growth is booming like no time in the
past half century. China, India, Brazil, et al. with two billion
plus people are racing to transform themselves, from
developing to developed countries. That type
growth enjoys the advantage of not having to invent the future but
just the necessity of replicating what is already in place in the
developed world.
Look inside the major market indexes and you see some
interesting divergences that support a thesis of global
industrialization on a massive scale. There are ten Sectors in the
S&P 500. This is how they fared for the 5 years ending
5/11/07:
Energy +126%
Materials +67%
Utilities +53%
Industrials +43%
Financials +41%
S&P 500 +39%
Telecom +38%
Information technology +34%
Consumer Discretion +19%
Health Care +19%
Consumer Staples +15%.
Wall Street’s conventional macro-economic view focuses on the
consumer as the primary engine of economic growth. This
myopic demand-driven perspective is poorly suited to capture the
dynamism of the current production-driven global expansion. And it
is clear from the list above that an investment outlook focused on
the consumer has missed out on much of the action over the past
five years.
Drill down further through the sectors to the 140 industry and
sub-industry groups as defined by Thomson Financial and you find
more of the same. The top five performing industries for the past 5
years (5/11/07):
Diverse Metal/Mining +521%
Oil & Gas Refining +386%
Steel +359%
Consumer Electronics +312%
Agriculture Chemicals and Fertilizer +307%
Four of the five industries are big beneficiaries of global
growth that outstripped worldwide capacity in their arenas — the
result great pricing power and exploding earnings. The words of the
great 19th century economist, Jean-Baptiste Say come to mind,
“Supply creates its own demand.”
The message of the market’s recent action may be that we have
passed through a discontinuity. Or to use NASCAR parlance; a
slingshot maneuver has taken place and the U.S. economy
now finds itself tucked snuggly behind the developing economies and
for the most part enjoying the ride.
