VOL. 127 | NO. 36 | Wednesday, February 22, 2012
The Worldly Investor
Here We Go Again
By David Waddell
Good news continues to exceed bad news, and the markets stand at multi-year highs. Political tensions that whipped the markets about last year have taken a secondary role, as stronger economic data and low market valuations have taken a primary role. With the Dow Jones Industrial Average kissing 13,000, a level unseen since May 2008, let’s compare the fundamentals now and then.
In 2008, at Dow 13,000, the economy and earnings were shrinking, unemployment was rising and interest rates were twice as high. Today, earnings are 40 percent higher, valuations are 30 percent lower, the economy is 1 percent larger and the unemployment rate is high but falling. In 2008, 13,000 was a level we fell through. In 2012 it’s a level we’ll climb through. While the levels may be the same, everything else is quite different.
According to economic pessimists, with the U.S. consumer de-leveraging, the U.S. economy will drag down global economic growth. A popular economic book titled “Flying on One Engine” asserts that the entire global economy depends on the U.S. consumer. Released in 2005, economists were responding to U.S. economic growth accounting for 60 percent of global growth between 1995 and 2002. The U.S. consumer, 70 percent of the U.S. economy, powered global growth for nearly a decade. Between 1995 and 2002 real personal consumer expenditures in the U.S. grew nearly 4 percent annually. Between 2005 and 2011, however, they grew only 1.5 percent annually. Without the U.S. consumer, how could the world economy grow?
Between 2005 and 2011, the U.S. economy contributed just 5.7 percent of global GDP growth. China, largely overlooked in the early 2000s, contributed nearly 40 percent of global GDP growth over that time period, a perfect substitute for the U.S. consumer. In 2011, the emerging markets generated 77 percent of global GDP growth and may generate a like amount for 2012. While the world may have been flying on the U.S. consumer engine for growth between the mid-1990s and the mid-2000s, the emerging market engine carried us from the mid-2000s to today. What if both were firing?
The U.S. unemployment rate has fallen from 10 percent to 8.3 within the last year and a half. Real disposable personal incomes and consumption have increased 4 and 5 percent, respectively, over that time period. As the job market improves, incomes rise, balance sheets firm, and consumption follows. A revival of the U.S. consumer isn’t necessary for global GDP growth, thanks to the Chinese, but it would add a multiplier. Imagine the lift with two engines on the plane. Anything can happen, and the Eurozone adds down flaps, but the combination of acceleration in the U.S. economy and the continuation of emerging market growth would prove potent. This scenario currently strikes fear in the heart of those underinvested or short this market. … Undoubtedly contributing to the buying panic we have witnessed so far in 2012, making this punch through 13,000 all the sweeter.
David Waddell, who is regularly featured in the Wall Street Journal, USA Today and Forbes, as well as on Fox Business News and CNBC, is president and CEO of Memphis-based Waddell & Associates.