The issues in Europe and abroad still remain my number one concern. Investors likely remember that Europe and Asia were the primary driver of earnings growth during the 2003-2007 bull market. The S&P 500 generated over 50% of its earnings from abroad during the last bull market. Well, those drivers are gone (though Asia is showing signs of life mostly due to the Chinese stimulus package which I believe could have long-term negative ramifications). Domestically, earnings growth was in the low single digits and we’re likely to return to that sort of growth when we recover. Why? Mostly because Europe is lagging the U.S. substantially heading into the downturn and I believe their issues are far more severe. So, let’s assume we are actually coming out of this recession along with Asia, but Europe is lagging. Therefore, it’s safe to assume that Europe will lag coming out and is more likely to stagnate due to the severity of issues. Where will the earnings growth come from? The financial sector used to generate 25% of the earnings growth, but their deleveraged business model will change that drastically. Remove the European component of earnings growth and we’re likely looking at low single digit earnings growth at best when things begin to improve – and that’s assuming they actually improve. Adding more fuel to the fire is the fact that most of the earnings abroad are commodity driven and with most commodity prices off 50%+ and deflation gripping the global economy it’s highly unlikely that we’ll see substantial commodity growth in the coming years.
At the end of the day, it’s all about the consumer and jobs. The global job market could be the number one obstacle to future earnings growth. The following report shows the global employment. The numbers are showing signs of deceleration, but are still alarming.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
Onlooker
Yes I believe that most are still in denial (or cloaked in ignorance) about the breadth and depth of this global recession. We’ve been told that another Great Depression just couldn’t happen so many times that many just won’t look there. So much of the analysis I’ve seen lately justifying this market rally and looking to a steep recovery starting in the 2nd half of ’09 is based on post WWII recession history. It’s folly to not realize the impact of the deleveraging going on world wide and the structural problems with our ecomony. This is no “typical” cyclical downturn.