Global economies and stock markets have always had a strong tendency to move in lockstep with each other. That tendency has become even more pronounced as global economies have become increasingly dependent on each other in international trade of their goods and services.
So the divergences this year have been rather odd.
The U.S. economy stumbled in the first half of the year, resulting in the U.S. stock market tumbling into a quite serious correction in the summer months, with the S&P 500 down 20% at one point. But the economy began recovering in the fall, and the U.S. stock market has been in an impressive rally since its early October low, the Dow gaining 15% from that low, and closing up approximately 6% for the year.
In the process it has broken out above its important long-term 200-day moving average again, its bull market that began in early 2009 still intact. And it enters the new year near a new rally high, and with economic reports increasingly positive.
But far from moving in tandem, numerous markets outside of the U.S. have been quite ugly in 2011.
For instance, China, the world’s 2nd largest economy, sees its stock market in a quite serious bear market, down 30% over the last 13 months, and entering the new year still in a negative downtrend.
And that’s in spite of China’s economic strength still being at a level that’s the envy of the rest of the world. China’s economy has grown at an average annual rate of 10% for more than 30 years (which is how it has become the world’s 2nd largest economy).
Economists estimate that China’s growth slowed to 9% this year, and will slow further to 8.5% next year. But that compares to Goldman Sach’s estimates that U.S economic growth, which has been recovering from the first half slowdown, will still only reach 3% next year.
The stock markets of other large Asian countries like India, Hong Kong, and Japan have not experienced the resilience seen in the U.S. market either. They are in bear markets, down 26%, 26%, and 22% respectively as they enter the new year.
It’s not much different in Europe where the stock markets in Germany and France, the eurozone’s two largest economies, enter the new year also in bear markets, down 22% and 24% respectively, although higher than at their October lows.
Can the U.S. market continue to outperform the rest of the world next year?
The U.S. economy continues to recover from the severe recession of 2008. The employment picture, although still dismal, is improving, with the unemployment rate down to 8.6% in November, its lowest level in three years, and the four-week average of new weekly unemployment claims at their lowest level since June, 2008. Consumer confidence is at its highest level since last April, factory output is rising, and even the housing industry is finally showing signs of recovering.
The biggest threat is that the debt crisis in Europe might finally implode and push Europe into an economic recession that would spread around the world to include the U.S. The markets in Europe and Asia seem to have factored that possibility into stock prices with their bear markets of 2011.
However, encouraging assessments regarding the eurozone debt crisis have begun creeping out from under the year’s overwhelmingly negative headlines, with some economists now predicting the crisis will be contained by recent measures undertaken by the EU and ECB, and will be more permanently resolved by mid-2012.
If markets in Asia and Europe begin to factor in a positive outcome, or even just that the crisis will be kicked down the road again, their bear markets would likely end and be replaced with new bull markets. That would free the U.S. market from the drag they have had on it, and the U.S. market rally could indeed have further to run, with global markets moving in tandem again giving it a further push.
Is it too much to hope for? Maybe not.