A couple of milestones for world markets were hit in the past week. The S&P 500 is up 70% since its March 9 low, which is nice as far as it goes but more importantly for the real economy, vehicle production in the United States is up 45%, semiconductor sales are up 48% worldwide, China retail sales are up 32%, U.S. chain store sales are up 4% and if you put it all together and take out labor, you’ll see that corporate profits are up 40%.
On the other hand …. mid-March is always a reminder that the Nasdaq remains leagues away from its old high. Kind of a sore subject for many, but it’s down 55% from March 10, 2000. That’s the very definition of a secular bear market.
What’s interesting is that after this long period of stock consolidation, real global GDP is up 20% from March 2000 levels, world semiconductor sales are up 50%, China’s GDP is up 160%, crude oil is up 155% and the cost of money denoted by the Fed Funds rate is down 5.5 percentage points. And therefore while all the focus in 2000 was on the Nasdaq, plenty of money has been made in the past decade in underappreciated corners of the market, as shown in the chart above, such as beverages a la Ambev (ABV), food via General Mills (GIS) and real estate trusts via National Retail Properties (NNN).
Now by the same token, the Nasdaq has become underappreciated after this long journey into the valley of death, and could very well outperform in the next decade. At least you can’t look at its components and say they are extremely overvalued now, as you could in 2000.
So while stocks are overbought now here in late March, there is plenty of wind in the sails of global economic growth to re-engage investors very soon. In fact if forecasts of 4% U.S. economic growth for this year are right, then U.S. GDP will surpass its 2008 peak as soon as the second half of this year.
I know this sounds a little odd considering that employment and wages are flat while credit is flat, but a simple equation proposed by Ed Chancellor at Grantham Mayo Van Otterloo explains this works. He says: Assume income is unchanged at 100 and credit contracts 10. Then spending will be 90. In the next year if income is again unchanged then spending can rise to 95.
This expansion shows up pretty well in the leading economic indicators, or LEI. Despite the credit contraction, the U.S. LEI is reported to be up another 0.7% in March after rising 0.1% in February, month over month, which puts the current recovery at the strongest pace since 1983, a shown above (courtesy of ISI).
From a practical point of view, you can probably see this improvement in your own neighborhoods and downtowns. The Miami Herald last week reported that condos in downtown Miami are no longer ghost downs as young professionals move in and drive business to area stores and restaurants.
In summary, economic growth is robust enough to support higher stock prices. The market will swell and contract this year to its own melody — down in February, up in March, and probably volatile in the same way all year — but don’t lose sight of the bigger picture. The unprecedented amount of fiscal and monetary stimulus poured into the global financial system will have a profound effect over the next couple of years, supporting stocks and other risk assets.
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