January 6, 2022
In this week’s Weekly Market Commentary (click here) we shared some lessons investors may have learned—or re-learned—in 2021 (LPL Research strategists included). One of those lessons was about how valuations are rarely good timing tools. That lesson was particulary relevant for global asset allocators last year who were constantly tempted by attractive stock valuations outside the U.S.
We were tempted as well, to the point where we upgraded our negative view of developed international markets in June to neutral in our Global Portfolio Strategy report. The (too early) upgrade was about more than just some of the lowest valuations compared with the U.S. in decades. We also thought the pandemic was coming under control and that the global economy was on the cusp of an elusive synchronized recovery. Unfortunately, because of the latest variants of COVID-19, that call was too early and we’re still waiting. The MSCI EAFE Index, the benchmark for developed international equities, lagged behind the S&P 500 by nearly 14 percentage points from June through December of last year.
We liked the valuation story in emerging markets (EM) too, enough to come into 2021 with a positive view. But China’s regulatory crackdown scared us off, while technical analysis (market insight derived from price and sentiment anaysis) was telling us something was amiss. So we downgraded EM equities to neutral in June, and to negative in August. Our EM call turned out better, as EM underperformed the S&P 500 by about 24 percentage points from June through December, including 12 percentage points after our August downgrade.
“We’re still waiting for that elusive synchronized global economic recovery to provide a catalyst for better international stock market performance,” said LPL Financial Equity Strategist Jeffrey Buchbinder. ”It could come in 2022 but the world needs to get closer to the end of the pandemic.”
That doesn’t mean the global economy isn’t growing. Far from it. We expect global gross domestic product (GDP) to have grown at a nearly 6% pace in 2021 followed by 4.5% in 2022. Our LPL Chart of the Day shows continued steady growth in global manufacturing activity with a December Purchasing Manager’s Index (PMI) for global manufacturing solidly in expansionary territory at 54.2. But this measure of manufacturing sentiment has fallen from its summer highs due to the latest waves of COVID-19 (mostly Delta with a little bit of Omicron mixed in) and has gone nowhere the past few months.
Peeling back the onion reveals some good news underneath the mixed headline. Part of the lack of improvement in PMIs is for a good reason, as easing of supply chain bottlenecks is being reflected in falling supplier delivery times that mechanically drag down the headline index.
That’s not all the good news. The prices components of the global PMI dipped a bit in December, signaling global inflation pressures have eased some.
The global economy is clearly not yet firing on all cylinders, which we believe reduces the potential for international stocks to outperform the U.S. in the near-term. But global PMI data suggests solid and steady growth in global manufacturing activity along with some easing of supply chain bottlenecks and related inflation pressures. That elusive synchronized global economic expansion probably has to wait for more progress toward ending the pandemic but progress is being made.
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