Perhaps more than at any other time, global economic conditions are influencing outlook from investment professionals willing to offer a forecast of the market direction.
Economic data reveals significant headwinds that will likely limit Gross Domestic Product (GDP) growth and drive government debt to seemingly impossible highs. But does the state of the economy dictate the performance of stocks and bonds around the world?
Consider two views of the relationship between economic output and stock market valuation:
1. Fast Growing Economies Don’t Always Translate to Strong Stock Market Returns
Data compiled by Credit Suisse demonstrates that it’s actually markets in countries with the lowest quintile of economic growth that generate the highest investment returns.
Blackrock CIO Bob Doll reviews this information and concludes:
“Investors have not automatically obtained excess returns by investing in higher GDP growth markets (typically emerging economies). Buying stocks in low-growth countries has equaled or exceeded the returns from buying stocks in the high-growth economies. Because developed markets are often underpriced relative to their high-growth emerging market cousins, these slower-growth economies have often delivered superior returns. Because of the cyclical recovery trends, we believe that US stocks, in particular, offer better prospects, and are, in this sense, an attractive ‘value play’ for investors.”
2. Companies are not impacted equally by economic struggle
According to Bill D’Alonzo, CEO of Friess Associates, managers of the Brandywine Funds, the economic cycle does not dictate the return prospects of all companies.
“In our opinion, broad economic signals rarely mark a discernible path for investors to follow, leaving individual-company fundamentals as the best way to navigate the environment ahead,” D’Alonzo writes. “Companies with solid balance sheets and efficient operations that generate strong earnings on tangible revenue gains are well positioned to stand out in the kind of climate we confront as we embark on the second half of 2010.”
~ Brooks, Hughes & Jones, Partners in Wealth Management — Gary Brooks, CFP®, Allyn Hughes, CFP®, CLU, ChFC, Nancy Jones, CFP®
