Heading into 2013, worried investors seem to have plenty of sound reasons to consider paring back their exposure to domestic stocks. With only two weeks remaining in 2012, Congress and the White House have made little headway on a deal to avoid the spending cuts and tax increases that are set to kick in at the end of December - a jolt that economists say could send the economy into recession.
And even if this so-called fiscal cliff is averted, the economy is still expected to grow at only a tepid annual rate of 2%. Corporate earnings growth, meanwhile, has fallen from a rate of more than 17% in the third quarter of last year to just 2% today. And revenue among companies in the Standard & Poor's 500-stock index is essentially flat, a sign that the global economy is slowing.
Although all these trends would appear to bode poorly for stocks, on the theory that a weak economy reduces investor appetite for risk, there's a problem with drawing that conclusion: History has shown that lousy economic conditions , or even dismal corporate results, don't necessarily lead to disappointing stock market returns in any given year— or decade, for that matter.
When you buy stocks, you are ultimately buying a share in
Investors need only look to the current year as an example . The domestic economy has grown at an annual pace only slightly above 2%, subpar by historical standards.
Overseas , the picture is worse: Japan is teetering on the brink of yet another recession, large parts of Europe's economy are contracting, and China's pace of growth has slowed. Yet against this bleak backdrop , US stocks have returned 15%, on average, this year, while those in Europe have gained 18% and Asian stocks are up more than 12%.
Roger Aliaga-Diaz , senior economist at the Vanguard Group, says investors shouldn't be surprised about the seeming disconnect between basic economic variables and stock market performance . He and his colleagues at Vanguard recently studied equities' returns going back to 1926, looking specifically at the predictive power of important variables.
Those include market priceto-earnings ratios, growth in gross domestic product and corporate profits, consensus forecasts for gross domestic product and earnings growth, past stock market returns, dividend yields, interest rates on 10-year treasury securities, and government debt as a percentage of GDP.
Their conclusion was that none of these factors — which investors often cite when explaining their moves — come remotely close to forecasting accurately how stocks will perform in the coming year.
What about economic fundamentals like GDP and corporate earnings growth? Over the course of a decade, those factors had even less predictive power over future returns .
Are investors simply ignoring economic conditions and fundamentals? No, Aliaga-Diaz says. He notes that information about historical trends, like those for GDP and earnings, is already widely known on Wall Street. That means these trends are priced into the market before stock prices start to move over the next year or decade.
As for earnings and economic growth projections, "those forecasts tend not to diverge too much from the consensus ," he says. "And consensus estimates for future growth are also already priced into the market." That may help explain why, despite all the storm clouds hanging over this economy, professional investors appear willing to look past the poor data.
| ||
UN warns of second recession on EU, US conditions Daily News & Analysis The United Nations has lowered global economic growth forecast for the coming two years even as it warned of a new global recession due to the US fiscal cliff situation and EU debt crisis. It also said inflationary pressures and large fiscal deficit ... See all stories on this topic » | ||
Why a recession may be coming no matter what fiscal-cliff deal is reached MarketWatch (blog) Spoiler alert: We could already be in a recession. This is not the conventional wisdom. The common narrative goes some like talks look ugly, but in the end things will get resolved either before Jan. 1 or later in the month and the economy gets a new ... See all stories on this topic » | ||
Graphic: Comet's collapse and other post-recession retail failures Telegraph.co.uk The British furniture and kitchens giant was the first casualty of the global recession. After negotiations failed over MFI's wish for a three-month rent holiday, on 19 December every one of MFI's 111 stores across the country were closed along with ... See all stories on this topic » | ||
| ||
Recession taking its toll on men the Irish News At Christmas, many people already under pressure due to the financial crisis will feel stretched to breaking point. Southern correspondent Valerie Robinson reports on how the recession has highlighted the vulnerability of men in particular to the ... See all stories on this topic » | ||
| ||
Kim Bielenberg: Recession was no barrier to the young Irish innovators Irish Independent THE four Irish innovators who feature in the Forbes list of "30 under 30" to watch in 2013 show that there is economic life beyond the grim world of bust builders and inept bankers. Our sixth austerity budget in a row may have caused us to dwell ... See all stories on this topic » | ||
Work-related vehicle accidents, claims down during recession: NCCI Business Insurance Work-related vehicle accidents declined during the recent recession, and likely helped reduce the number of workers compensation claims resulting from such collisions, NCCI Holdings Inc. said Tuesday. In a report, Boca Raton, Fla.-based NCCI said that ... See all stories on this topic » | ||
Market Research Report -- Eyewear Market Emerging From Depths of Economic ... Marketwire (press release) ROCKVILLE, MD--(Marketwire - Dec 19, 2012) - MarketResearch.com has announced the addition of the market research report "Eyewear in the US" to their product offering. After suffering three consistent years of value sales declines, the eyewear market ... See all stories on this topic » |
Comments
Post a Comment