Here’s a human-bites-dog story: The U.S. stock market was a rock of stability and beacon of hope Wednesday, compared with international markets.
On Wednesday the Standard & Poor’s 500 index of major U.S. stocks ended nearly unchanged, while the S&P BRIC 40 index, reflecting stocks in Brazil, Russia, India and China, dropped almost 6 percent.
Ponder it with your morning coffee, because it might not last. But one of the untold stories of the 2008 stock market so far is that the global winners have been losers.
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BRIC markets have lost 10 percent this year, compared with a 6.5 percent decline for the S&P 500 index.
Last year the S&P BRIC 40 index climbed 48 percent, compared with a 3.5 percent gain by the S&P 500. Except for Russia, the BRIC stock markets have expanded in total value in the last 12 months, while markets in the U.S., Japan and Europe slipped.
Conventional wisdom says international economies and stock markets are retreating because of forecasts of a U.S. recession. We’re told that if the U.S. consumer sneezes, the rest of the world gets a cold.
There’s truth in that from a stock market perspective. The U.S. equity market represents more than 28 percent of the world’s stock market value, compared with 21 percent for Europe, 8 percent for China and 7.5 percent for Japan.
But the more important story for fledgling international investors is that problems are developing from Europe to China that have little or nothing to do with the outlook for the U.S. economy.
“The connection between U.S. consumption and economies outside the U.S. is not that strong,” said George Greig, head of international investing at William Blair.
Officials of the European Central Bank, like those at the Federal Reserve, are warning of slower economic growth. But in Europe the issues concern the prospect of sluggish demand for capital goods from emerging nations, not the U.S. consumer slowdown, Greig said. “At this point in this cycle the emerging market influence is much more important than the U.S.”
“Euroland’s problems are caused by Euroland’s conditions and policies, not by the U.S. situation,” agreed Carl Weinberg, chief economist for High Frequency Economics. “The Euroland economy has been cruising for a bruising for a while, with depressed real [inflation-adjusted] incomes, high interest rates, high deficits and a strong currency.”
In China, the principal driver of demand for commodities and capital goods, clouds are forming. On Wednesday Chinese authorities hoping to battle inflation, especially in food prices, decreed food producers must seek government approval to raise prices. The news helped send agricultural prices lower in futures markets.
Concerns about China arise from “food inflation, an exporter profit squeeze, an Olympic letdown and heavy-handed policies, not the U.S.,” said Weinberg. Chinese authorities are restraining bank lending.
Greig said it’s easy to overread the situation. “I don’t think you can infer that there is any message in the decline in BRIC stocks that says anything about the course of the economies,” he said.
But “if we have a collapse in commodity prices, then emerging market economies are going to be hurt,” he said. “That’s the window into a global recession. If the pullback in growth in [developed] countries is so strong that commodity prices suddenly collapse, then you have a bad situation.”
The Dow Jones/AIG index of commodity prices has been gyrating so far this year. Oil prices, a principal component of the index, have dropped 9 percent, to about $90 a barrel, from their flirtation with the $100 mark at the start of the year.
“If we pull back in oil to $80, I don’t think that has much effect,” Greig said. “But if somehow the psychology gets unhinged and we start taking about 30 percent down from here, then a lot of investment plans are going to have to be rethought.”
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Stock market capitalization
Percent change from Jan. 2007 to Jan. 2008
COUNTRY / CHNG. IN EQUITY MARKET CAP %% United States -6.3% Japan -2.2% United Kingdom -1.4% France -0.6% Italy -0.4% Russia -0.3% South Korea 0.1% Australia 0.4% Brazil 0.7% Hong Kong 0.9% India 1.4% China 6.2% %% SOURCE: Bespoke Investment Group
TRIBUNE GRAPHIC
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