Home About Archives RSS Feed

@theMarket: Pay Attention to Diverging Markets

By Bill SchmickiBerkshires Columnist

It was a turbulent week for U.S. stocks as the strong dollar and worries over possible rising interest rates spooked investors. But not all markets followed our lead. This divergence could be the beginning of a trend that could benefit your portfolio.

Normally, the American stock market is the big dog that wags the tail in international markets. When U.S. averages decline, foreign markets fall with them and vice versa. "De-coupling" occurs when the opposite happens like it did this week.

While U.S. stocks declined, both the Chinese and Japanese stock markets gained. Other Asian markets also did well, especially South Korea, which cut a key interest rate this week. So far in 2015, Japan is a clear winner, gaining 8.4 percent year-to-date, while China has trailed with only a 3.5 percent gain. However, those gains look good compared to the S&P 500 Index, which is flat for the year.

Europe, thanks to the launch of their own quantitative stimulus program, is up 15 percent so far this year but in all these cases appearances can be deceiving. If an American investor had purchased either European or Japanese shares without hedging the currency, those gains would have been much less. In the case of Europe, where the Euro has declined by 13 percent, the U.S. investors' gain is about 2 percent, still better than the U.S., but not by much.

Recently, many equity strategists are coming around to my point of view. As most readers know, I've been bullish on Japan since June, 2011, when the Nikkei was trading around 8,900, compared to over 19,000 today. Readers also know that I have reiterated my positive stand on China, Japan and Europe several times over the last year and with good reason.

The worldwide trend by central banks to lower interest rates and stimulate their slow-growing economies is having a predictable positive effect on many foreign stock markets (as it did in the U.S. over the last five years). In contrast, our own Federal Reserve Bank has wound down our stimulus program and is preparing to raise interest rates now that the country is growing again. That has triggered a rise in the dollar and demand for U.S. Treasury bonds.

All of this sounds good and it is over the long-term, but short-term it causes problems here at home. Most large U.S. companies depend on foreign markets for a healthy share of their profits. The 23 percent rise in the dollar against a basket of currencies since last June has hurt profits considerably. So much so that analysts are predicting that 2015 could be the worst year for corporate profits since 2009 (when earnings fell 5.5 percent).

I am not expecting that sort of shortfall, but first quarter 2015 profits could decline by over 2 percent and the second quarter should be down as well. And adding to the export woes, the decline in oil prices is also having a negative impact on corporations in the energy sector.

Given this wall of worry, is it any wonder that our stock market should be trapped in a trading range? So far this year we have vacillated in a range of -3 percent to 3 percent and I expect that to continue until we have more clarity on all of the above concerns. Does this mean I've turned cautious on the U.S. market?

Not at all; American corporations have coped and even prospered in a strengthening dollar environment in the past. The stock market has also done quite well when interest rates have risen throughout our history, as long as rates do not rise too much. Lower energy prices have also turned out to be a great boon for economies worldwide. All that is required is a little patience while we wait for our economy to adjust to these conditions. And as we wait, a little money in certain foreign markets is not such a bad idea.

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

     

Support Local News

We show up at hurricanes, budget meetings, high school games, accidents, fires and community events. We show up at celebrations and tragedies and everything in between. We show up so our readers can learn about pivotal events that affect their communities and their lives.

How important is local news to you? You can support independent, unbiased journalism and help iBerkshires grow for as a little as the cost of a cup of coffee a week.

News Headlines
Community Hero of the Month: Christine Hoyt
MassDOT Advisory: South County Road Work
Simon's Rock Welcome Alum as Commencement Speaker
Governor Nominates Two to District Court
Turtles Must be Left in the Wild
Cyclists Pedal Into Berkshire Bike Month
Dalton Town Meeting May 6 Preview
Pittsfield Hydrant Flushing Schedule: Phase 2
State Closes Brookside Road Bridge
Special Minerals Agrees to Pay Adams, River Groups Over River Discharge
 
 


Categories:
@theMarket (485)
Independent Investor (451)
Retired Investor (188)
Archives:
May 2024 (2)
May 2023 (8)
April 2024 (6)
March 2024 (7)
February 2024 (8)
January 2024 (8)
December 2023 (9)
November 2023 (5)
October 2023 (7)
September 2023 (8)
August 2023 (7)
July 2023 (7)
June 2023 (8)
Tags:
Japan Pullback Stock Market Federal Reserve Energy Rally Deficit Currency Debt Recession Greece Commodities Congress Election Stocks Jobs Metals Taxes Europe Oil Fiscal Cliff Interest Rates Employment Selloff Retirement Stimulus Economy Bailout Banking Europe Banks Euro Crisis Debt Ceiling Markets
Popular Entries:
The Independent Investor: Don't Fight the Fed
Independent Investor: Europe's Banking Crisis
@theMarket: Let the Good Times Roll
The Independent Investor: Japan — The Sun Is Beginning to Rise
Independent Investor: Enough Already!
@theMarket: Let Silver Be A Lesson
Independent Investor: What To Expect After a Waterfall Decline
@theMarket: One Down, One to Go
@theMarket: 707 Days
The Independent Investor: And Now For That Deficit
Recent Entries:
@theMarket: Whipsaw Action Leaves Markets Higher
The Retired Investor: Unions Make Headway Across Nation
@theMarket: Two Steps Forward, One Step Back Keep Traders on Their Toes
The Retired Investor: Real Estate Agents Face Bleak Future
@theMarket: Markets Sink as Inflation Stays Sticky, Geopolitical Risk Heightens
The Retired Investor: The Appliance Scam
@theMarket: Sticky Inflation Propels Yields Higher, Stocks Lower
The Retired Investor: Immigration Battle Facts and Fiction
@theMarket: Stocks Consolidating Near Highs Into End of First Quarter
The Retired Investor: Immigrants Getting Bad Rap on the Economic Front