I’ve been having a horrible time organizing this post. I keep going off on tangents. So I’ve decided to stick to making assertions.
The long-term growth rate for real (i.e., adjusted for inflation) GDP in the US is around 2%. We’ve been growing at that rate for the past few years.
I don’t see any reason why 2013 should be any higher. Arguably, the withdrawal of government stimulus could shade that figure downward a bit.
If we assume inflation at 2%, this means nominal GDP growth of 4% for 2013. That probably translates into 7%-8% profit growth for the domestic operations of US-listed companies.
changing growth patterns
The pattern of this recovery has been far different from the norm for the US during my working career. Industry, tourists and the affluent–not the usual suspects (housing, autos and widespread consumer spending)–were the hot spots during the earlier years.
In mid 2011, focus shifted. Recovery broadened to include more ordinary Americans. Early 2012 gave the first signs that the domestic housing market was bottoming, suggesting an uptick in activity was in the offing. At around the same time, slowdown in China called into question the durability of the luxury goods/tourism boom.
2013? I think housing and consumer durables (like cars) will be the stars. Reacceleration of the Chinese economy after the recent change in Communist Party leadership will also boost businesses that cater to Pacific Basin demand.
pent-up demand, anyone? …anywhere?
The recovery is pretty long in the tooth, both in business cycle and stock market terms.
Typically, when the economy is under stress, individuals stop buying and companies defer investment. This creates “pent-up” demand that begins to be satisfied as soon as economic circumstances look brighter. Spending surges for a while and then tails off to trend.
More than four years in, there’s not much that hasn’t had a chance to experience this cyclical surge. Exceptions: Housing is one area. Autos are another. We’ll be getting fresh data in a couple of weeks, but a year ago the average car on the road in the US was 11 years old.
As they see that pent-up demand is increasingly satisfied in the economy, stock market investors always increasingly shift their focus away from economically sensitive names and more toward niche companies with a history of strong profit growth in both good times and bad. In other words, they shift from value to growth. I think this will be another important feature of 2013.
Washington, a force for PE multiple expansion?
Over twenty years ago, a former colleague helped me to the conclusion that neither major political party in the US had an economic agenda appropriate for the modern world. I think this is truer now.
Back then, the possibility that Washington craziness was clipping 1% a year off real GDP didn’t seem that important (I’ve just made up the 1% number, but I don’t think having an exact figure is critical). Inflation was higher; real growth was better, too. So if the political status quo meant nominal GDP growth came out at 6% instead of the 7% it might have been were economically sensible policies in effect, did it really matter that much?
Today, in contrast, those extra 1%s would come in mighty handy. Growth is slower. International competition is fiercer. And we’re in the earliest stages of national belt-tightening needed to pay the gigantic bills Washington has run up. But everyone knows that Washington is dysfunctional and is steering us along the initial leg of the same trip Japan has taken from world dominance to irrelevance.
An investment point? I think that the worst that we can reasonably expect from the White House and Congress is already pretty much factored into today’s S&P price earnings multiple.
Yes, this may unfortunately be the most probable case…
…but if I’m right, it would be hard for Washington to create a negative surprise. Even a mild positive one could create multiple expansion. Not anything to act on today, but something to keep in mind.
US economy vs. US stock market
It’s important to keep in mind that the course that US GDP takes and the one the US stock market takes are two separate things. For one thing, half the profits of the S&P 500 come from non-US operations (split roughly equally between the EU and emerging markets). For another, some important sectors of the economy, like autos, construction or real estate, have little representation in the index.
For 2013, a key question will be how to arrange the mix of domestics and foreign-earners in the portfolio.