I can think of a dozen reasons why, in the long term, U.S. stocks will do worse than stocks in China, Brazil, India and Canada -- and maybe even in Norway, South Africa, Germany and Turkey.
Huge government debt, highly leveraged consumers, underinvestment in infrastructure, a lagging education system, rising interest rates, a small and, in industries such as autos, uncompetitive manufacturing sector, out-of-control health care costs . . . do I need to go on?
But in the next three to six months, I can't think of a better stock market in the world for my money. China? Beijing is raising interest rates and shrinking the money supply. Brazil? It's looking at rate increases, too, and all the uncertainty that comes with a close presidential election. India? Interest rates and inflation are both due to climb.
In contrast, the U.S. looks like it's in for stable interest rates, inflation just high enough to take worries about deflation off the table, and easy year-to-year corporate-earnings comparisons with the first half of 2009.
Hey, I still think there's plenty of bad news coming our way in the fourth quarter of 2010 or early in 2011, but in the short run, the U.S. stock market looks, comparatively, like the best bet in the world for equities. I'm not saying the U.S. market and economy are perfect or wonderful -- just that for this period they look better than the other guys'.
Over five to 10 years, I think stocks from China, Brazil and the rest of the developing world will leave U.S. stocks -- and stocks from other developed economies even more so -- in their dust. But U.S. stocks are attractive enough in the short run that putting some cash to work there makes sense.
After my sell of GulfMark Offshore (GLF, news, msgs) on March 10, Jubak's Picks is up to 14% in cash. I'm going to put some of that to work with a buy at the end of this column. And I'll give you two more potential buys if your portfolio has more cash on the sidelines than mine does.
Think long, act short
One of the lessons that the bear markets of 2000 and 2007 should have taught us is that investors need to think both long and short term. It's not enough to put your money behind a great long-term stock and then forget about it, lulled into complacency by a belief that in the long run your investments will do fine.In the short run, we've learned, even the best long-run stocks can take beatings so horrible that most investors can't hold on for the turnaround.
Click graphic to access interactive chart
- On Sept. 30, 2005, Google sold for $316 a share.
- By Oct. 1, 2007, it was at $583, and you were up 84%.
- By Nov. 24, 2008, it was down to $257, and you were down 56% from October 2007 and down 19% from September 2005.
- On March 16, 2009, the stock was back to $565. And an investor was up 120% from November 2008, down 3% from October 2007 or up 79% from September 2005.
I'm not saying that you had to trade Google during these market ups and downs in the hope of catching the tops and bottoms. But you sure could have used tools as time-honored as dollar-cost averaging, which would have led you to buy more shares when they were cheap and fewer when they were expensive. Growth at a reasonable price would have guided you to sell some of your position when the stock was trading at a high price-to-earnings-to-growth ratio and buy when Google's growth was relatively cheaper. Or good-old portfolio rebalancing (to trim big positions). Or by-the-book portfolio diversification (to keep the asset classes you own in balance). Or even some macroeconomic timing (to sell when the economy for advertising, Google's main product, soured and buy on prospects for recovery).
Feeling like you can't do anything that matters leads to panic and then, frequently, to selling in despair at the bottom. If your strategy does nothing more than help you hang on in the short term through volatility so you actually reap long-term rewards, then that strategy is working for you.
That's especially true with a market like this one that's constantly setting out the punch bowl and then taking it away. The short-term rallies and reversals, the head fakes and the bear traps are enough either to drive you out of the market because it's just too frustrating or to entice you into gradually taking on more risk than you should out of frustration.
Oddly enough, I think focusing some attention and a little bit of money on the short term is exactly how you can keep from blowing up your long-term strategy out of frustration. (I suggested this same kind of short-term/long-term thinking for income investors in my March 4 column, "Is there anyplace to put your cash?")
How frustrating is this stock market right now?
Think about 2009, when everybody was saying that China's stocks were the great long-term growth story of our time. (I agree -- mostly. I do prefer some other developing markets to China, but China is, in my opinion, an amazing growth story for the next decade or two. For a look at the countries I prefer to China, see my Feb. 4 column.)
And this year? Blah! (A highly technical financial term. Sorry to use jargon, but sometimes it's necessary.)
The iShares FTSE/Xinhua China 25 (FXI, news, msgs) exchange-traded fund, which tracks 25 of China's biggest companies, was down 5% for 2010 as of March 16. The Shanghai Composite Index was down 9.2% for 2010 -- and that's after rallying from its February low.
And the much-reviled and, over the long term, perhaps justly scorned U.S. stock market? The Standard & Poor's 500 Index ($INX) was up 2.3% for the year as of March 16 (and up 10% from its Feb. 8 low).
That's not a huge gain, but we're talking about what's likely to be a really tough year for stocks -- if the U.S. stock indexes delivered 10%, I'd be ecstatic -- and not just absolute but comparative performance. That piddling 2.3% gain on the S&P 500 is a huge 11.5 percentage points above the loss delivered by the Shanghai market this year.
Continued: 3 ways to play the US
