The economy seems like it’s been in choppy waters lately. A rise in manufacturing is negated by a weak jobs number. The U.S. housing market’s signs of life are impeded by high gas prices. The eurozone appears to be improving, then a sovereign debt rogue wave surfaces in Spain.
| Global Component | Measures |
|---|---|
| Source: Bank of America-Merrill Lynch | |
| Industrial Confidence | Global economic output |
| Consumer Confidence | Demand/consumption side of the economy |
| Capacity Utilization | Investment/productivity side of the economy |
| Unemployment | Global labor market |
| Producer Prices | Producer prices in the manufacturing sector |
| Credit Spreads | Credit spreads using the Merrill Lynch Global High Yield Index as a proxy (the U.S. High Yield Master II Index was used prior to 1998) |
| Global Earnings Revision Ratio | Number of stocks with earnings upgrades versus the number with downgrades based on BofA-ML’s three-month consensus |
Last week, the Global Wave was signaling a trough in the global cycle, which prompted BofA-ML to suggest “investors position for an economic upturn” by increasing their exposure to equities. According to BofA-ML’s research, the MSCI ACWI (All Country World Index) averages a 14.2 percent increase for the 12 months following a trough in the Global Wave.Historically, the index has experienced a positive return 86 percent of the time.
What turned the tide? BofA-ML says global central bankers’ easing measures “appear to be having a positive impact” and macroeconomic data is improving. Collectively, global central bankers have implemented 138 stimulative policy initiatives in just the past eight months, according to ISI Group. The latest of these include the International Monetary Fund (IMF) doubling its eurocrisis fund to $430 billion, China easing monetary policy, and interest rate cuts in both Brazil and India.
Currently, five components (industrial confidence, earnings revision ratio, credit spreads, consumer confidence and capacity utilization) are trending positive while unemployment and producer prices are contributing negatively. BofA-ML says the global earnings revision ratio is currently the “largest contributor to the Global Wave.”
Earnings season is off to a great start in the U.S. Of the 106 companies in the S&P 500 Index that have reported results so far, 83 percent have beaten analyst estimates, according to a FactSet blog entry I found through Business Insider. If the current pace holds up, it would represent the highest beat-rate in three years.
Add this positive news about U.S. stocks to the data from BofA-ML above, which indicates emerging markets and the Asia Pacific ex-Japan region have historically been the best-performing regions following a trough for the Global Wave, and you have a real opportunity. In terms of which sectors have historically been the best performers, the data shows technology, diversified financials, basic materials, autos and energy have outperformed.
That’s good news for oil and gold stock investors. The Global Wave may be just what is needed to wash away the performance gap I highlighted in my previous post.
About The Author - Frank Holmes is CEO, Chief Investment Officer of U.S. Global Investors, an investment management firm specializing in commodities and emerging markets based in San Antonio, Texas. Frank is also the co-author of The Goldwatcher. (EconMatters author archive here.)The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.
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