Finding Interesting Opportunities outside the United States

Last update on: Oct 24 2019

While investors are focused primarily on the U.S. economy and markets, they’re missing some changes in Japan and Europe.

Let’s start with Europe. Many analysts have been negative about Europe for a while, especially since the “Brexit” vote last June when U.K. citizens chose to leave the European Union. But Brexit is going to be a long, drawn-out process with few short-term effects.

Analysts last year also were concerned about a similar referendum in Italy that potentially could have had significant negative effects. It turns out, though, that the failure of Italy’s constitutional referendum and the change in government were mere bumps in the road.

More importantly, many analysts didn’t notice that the European Union (EU) and European Central Bank (ECB) bureaucrats approved a bailout of the Italian bank that was in the worst shape. The bailout was supposed to be prohibited by the European charter. But it was approved anyway. This paves the way for bailouts of Italy’s other troubled banks, which would remove the major risk for the country’s economy.

In the meantime, the ECB continues its version of quantitative easing that’s supporting the European economy. More importantly, earnings of many European companies quietly are increasing and at a faster rate than U.S. earnings. With European stocks down over the last few years and earnings also down, there’s a lot of value in the European stocks and a lot of room for earnings to grow if the ECB’s efforts continue to work. The iShares Europe ETF (IEV) is up 2.39% in January and 8.67% for the last 12 months. I think there are more gains to come.

Similar things are happening in Japan.

Many analysts write off Japan because it has been stuck in a depression since 1989 and all efforts to reverse the trend failed. But the policy efforts of the last few years appear to be bearing fruit, at least for the short term.

Growth in Japan now is 2% or higher. The short-term cycle is positive. Even the labor market appears to be fairly tight. Improvements in the global economy also are helping Japan’s economy because of its heavy reliance on exports.

Japanese stocks, on the other hand, continue to be priced for expectations of the same stagnation that’s occurred the last few decades. That spells opportunity for investments in some Japanese stocks. The iShares Japan ETF (EWJ) is up 3.20% for January and 12.25% for the last 12 months.

While most investors focused on the United States over the last year, those who looked to Europe and Japan made nice returns.

There still are a lot of hurdles and potential problems in both Europe and Japan. For the present, however, both economies are turning up and the outlook for earnings is positive. There is more room to the upside than in the United States and probably no more risk to the downside.

The Data

There is a lot of data to cover this week.

Manufacturing continues to show signs of recovery at the start of 2017.

The Dallas Fed Manufacturing Survey came in at 11.9. That’s down from last month’s 14.8, but it’s still a solid growth number. The Dallas Fed Survey had about two and one-half years of decline, thanks to the oil price collapse, before leveling out late last year and increasing more recently.

Despite a negative headline number, Durable Goods Orders were positive. The headline number said orders declined 0.4%. But after excluding the volatile transportation sector, Durable Goods Orders increased 0.5% for the month and 3.5% for 12 months. Core capital goods, which are a good indicator of business investment in equipment, increased 0.8% for the month.

The PMI Manufacturing Index rose to 55.0 from 54.3. New orders are at a two-year high, and most components of the report were positive.

The ISM Manufacturing Index rose to 56.0 from 54.5. That’s a strong number and the highest since November 2014. It is another very positive report for manufacturing.

The Chicago PMI, which covers all types of businesses in the Chicago region, declined to 50.3. That indicates very low growth and is down from a strong 55.3 last month.

Consumer Sentiment, as measured by the University of Michigan, increased again to 98.5. That, of course, keeps it near the highs of the post-financial crisis period. Inflationary expectations are sharply higher in the report. The report found there is a partisan split, with optimism high among those identifying as Republicans and pessimism high among those identifying as Democrats.

Consumer Confidence, as measured by The Conference Board, declined a little to 111.8 from 113.7. But last month was a 15-year high, so this still is a strong number. Some components of the report weren’t as positive. Respondents were less confident about job prospects and income in six months.

Income continued its modest increases, registering a 0.3% increase in the Personal Income and Outlays report. Wages and salaries rose 0.4%. Consumer spending rose 0.5%, but that was exaggerated a bit by a strong increase in auto sales. Inflation, as measured by the Core PCE Price Index, rose only 0.1% and is up 1.7% for 12 months.

The Pending Home Sales Index, which measures contract signings for sales of existing homes, rose a strong 1.6%. Home sales growth has been relatively stagnant for months now, but sales are stagnating at a high number.

The S&P Case-Shiller Home Price Index, which measures prices through November, reported a strong 0.9% price increase for the month and 5.3% over 12 months.

The Employment Cost Index said employment costs rose 0.5% in the fourth quarter and 2.2% over 12 months. That’s a modest increase and includes both salaries and benefits. In the last year, salaries increased at a little bit faster rate than in recent years, while benefits increased less than in the recent past.

Productivity finally increased in the third quarter after being sluggish most of the last couple of years, according to the quarterly Productivity & Costs Report. Specifically, productivity rose 1.3%. Unit labor costs also rose 1.7%. With gross domestic product (GDP) reporting slower growth in the fourth quarter, the soon-to-be-released fourth quarter productivity report is likely to show slower productivity growth.

Tomorrow’s Employment Situation Reports might be strong. The ADP Employment Report said private payrolls increased by 246,000, compared to a 151,000 increase last month. This is well above expectations. New unemployment claims declined by 14,000, after a 23,000 increase last week. That makes this the first-time ever that the four-week average has been below 250,000 for at least three consecutive weeks.

The GDP growth rate declined to only 1.9% for the fourth quarter, according to the first estimate. Longtime readers know I don’t pay a lot of attention to this report, though it generates a lot of headlines. It’s backward-looking and subject to significant revisions. Also, as shown in this report, factors that don’t really matter to growth, such as inventories, have a great effect on the headline number.

The Markets

A sharp decline on Monday gave most stock indexes a negative return for the last week. The S&P 500 declined 0.79% for the week ended with Wednesday’s close. The Dow Jones Industrial Average retreated from its 20,000 close and lost 0.88%. The Russell 2000 lost 1.52%. The All-Country World Index declined 0.62%. Emerging market stocks were the week’s only winner among stocks, gaining 0.08%.

Bonds had a better week. Long-term treasury bonds rose 0.61%. Investment-grade bonds gained 0.21%. Treasury Inflation-Protected Securities (TIPS) appreciated 0.39%. High-yield bonds rose 0.13%.

The dollar lost 0.41%.

Energy-based commodities rose 0.71%. Broad-based commodities gained 0.22%. Gold appreciated 0.78%.

Bob’s News & Updates

I’ll soon be at the MoneyShow Orlando. It takes place Feb. 8-11 at the Omni Orlando Resort at ChampionsGate. For free registration, mention my priority code, 042315, when you call 1-800-970-4355.

For those who can’t attend, one of my presentations will be streamed live on the web for free. Click here for details.

Positive reviews continue to roll in for my latest book, the revised edition of “The New Rules of Retirement.”

Some Reading for You

This article describes the unique estate planning and business succession problems of top-tier artists.

This article has five long-term bond market participants describing what things were like at the end of the last bond bear market.

The luxury home market continues to have problems in many areas. Read details here.

I comment and link to these and other items on my public blog.

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