Interesting follow up to to our weekend post on overseas markets dragging US markets along with them: Today’s WSJ looks at An Unrelated Story: U.S., Global Stock Markets Increasingly Take Separate Paths.
"The problem is that many analysts see economic and
corporate-profit growth slowing in the U.S., while still expanding in
much of Europe, Japan and the developing world. The U.S. economy has
expanded about 2% over the past year. In Europe and Japan, economies
are expanding at a 2.5% clip, according to Morgan Stanley. Growth in
much of the developing world is poised to continue expanding at a
faster pace than in the U.S.
The higher correlations earlier this decade reflected
the bursting of the tech-stock bubble, because it dragged down most
developed markets, says Leila Heckman of Heckman Global Advisors, a
unit of Bear Stearns Asset Management. In recent years, she says, the U.S. market tended to
be less correlated with Japan, Australia, New Zealand and Singapore
than it did with European shares…Still, signs that economies around the world might be
decoupling from the U.S. are fueling hopes that stock-market
performances will diverge even further. While U.S. profit growth in the
first quarter is expected to be at the lowest level in five years, "the
rest of the world can continue to post solid growth even if U.S. growth
remains subpar," J.P. Morgan wrote in a recent report.Foreign companies may depend less on the American
consumer than in the recent past. Morgan Stanley says U.S. exports
account for only about 2.9% of Japan’s gross domestic product, compared
with 4% of GDP in previous decades. Emerging markets, meanwhile, are
increasingly selling commodities and other goods to China and India,
lessening their historical dependence on the U.S. export market."
Intriguing concepts: Correlation fading, global capital flows morphing, economic power shifting. We do indeed live in interesting times.
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Source:
An Unrelated Story: U.S., Global Stock Markets Increasingly Take Separate Paths
CRAIG KARMIN and JOANNA SLATER
WSJ, April 23, 2007; Page C1
http://online.wsj.com/article/SB117729114285878580.html
To get an accurate sense of Japan’s dependency on exports to the US, one would have to add in the goods they do the profitable parts of in Japan (design etc.) but farm out the non-profitable parts (final assembly) to China and SE Asia. Such production shows up as a Chinese export to the US, but is really mostly a Japanese export.
My hunch is that Japan is actually more dependent on the US consumer than ever.
OT:
Go Red Sox!! 4 homers in a row and a broom job on the Yanks!
Sorry BR.
The US is simply leading the curve overall, especially with regard to the UK and Europe, but also Asia. Our housing market is an example. We are in the first stages of a downturn, which Europe has yet to see. The global credit bubble will not go pffft at the same exact time in the same exact way everywhere. As Barry says, interesting times. Perhaps a little too interesting.
Traditionally, there was little correlation between international markets. Trading in tandem is only a recent phenomenon, doubtless driven by the increasing trend toward economic globalization since the end of the Cold War.
While correlations may be not be quite as strong as in the past, the graphs provided appear to still indicate a very high degree of positive correlation between markets. I’ll buy the “fading” correlation argument more if we see the scenario where (1) the US market tanks and (2) the international markets decline at only a fraction of the US change, stay flat or continue to gain.
The way I look at it, the US and international markets are still highly correlated but, more importantly, the beta associated with the international markets relative to the US market has increased substantially between 2004-2007 when compared to 2002-2003. Therefore, if a substantial drop were to occur within the US, I would expect to see a much bigger drop within the international markets.
Providing a real world example, the February drop in the US markets on both the DJIA and S&P was 5-6% whereas the international markets as a whole dropped 8-9%. Since the drop, the DJIA and S&P are about 1.0-1.5% over their February high whereas the international markets are now in excess of 2.0%. Still looks like a lot of correlation between markets to me!
Is this a decoupling of the rest of the world from the U.S. or is it more of an indication of the U.S. coupling with rest of the world? The globalization phenomenon has elevated the status of emerging countries while decreasing the relevance of the U.S. More and more the U.S. is losing its “Big Dog” status and turning into just “another one of the boys”. Although eons away yet from total equality of nations, the percentages shown look about right to me how far the U.S. has diminished in its importance.
Globalization so far has been a boon to the emerging market worker and to the U.S. multinational corporations, but has fallen well short of its promise of improving standards for the poor and middle class. As the U.S. continues to polarize its wealth and turns to a service industry economy, its value to the rest of the world’s economical well being will continue to diminish.
Please see the OECD leading indicators (April)they are not seing much decoupling in a slowdown Europe/US/JAPAN in the next future.
The stocks markets are homothetic and should not be correlated if decoupling means variable independant?.They have been for quiet few years is’n it?.
Profit growth for the Euro Stocks 600 seen at 6% in 2007 AGAINST 3.5% for the SP500.
GDP growth in France seen at 1.6/2% Germany 2/2.5%
Real estate prices are “rusting” if you remember this stage and definition.
The only big difference is the healthier “macro picture of public and private accounts” and yet consummer’s credit is at 100%of GDP Europe against 125% in the US.
If there is recession in US chances are high that the decoupling story will be only a broker story.
Foreign Brokers are working hard in order to review very richly the upgrade of European firms.
there still is a correlation, w/ a higher beta for emerging..
i remember folks denigrating 99-2001 about low growths in euro area///
things changed then and things will change again.
trends last until they change.
“In recent years, she says, the U.S. market tended to be less correlated with Japan, Australia, New Zealand and Singapore than it did with European shares…”
Why is this a surprise? “In recent years”, Japan has been in sync with… NO ONE! Their economy has been in the hopper, ours has been robust. As for New Zealand and Australia, of course we diverge from them in recent years. They are more heavily based no commodities than we are for the total GDP number. So what?
If China succeeds in changing where its economy to be more “inward” based, then we should benefit more than the commodity producers because we will be selling them higher priced, higher level PRODUCTS vs commodities.
The US has 5% of the world’s population, 25% of its economic output, and 40% of its stock market capitalization.
Few things are certain other than death and taxes, but US equities underperforming the rest of the world on a long term horizon may well be one of them.
“The US has 5% of the world’s population, 25% of its economic output, and 40% of its stock market capitalization……”
Would that our corrupt politicians devoted themselves to KEEPING the US on top.
If China succeeds in changing where its economy to be more “inward” based, then we should benefit more than the commodity producers because we will be selling them higher priced, higher level PRODUCTS vs commodities.
What products? TVs? DVD players? Game consoles? Coca-cola maybe, and cigarettes, gazillions of them. We’ll have to compete with the same products that we are gobbling up so eagerly over here! And that assumes they let us into their markets. Not to mention the fact that we’ll have to buy the raw materials (i.e., commodities) to make all those products with our worthless dollars.
They’ll only go “inward” when they don’t need us anymore. Now if the dollar gets really weak, maybe they’ll outsource their labor needs to the US…