6 Reasons U.S. Stocks Will Outperform Foreign Stocks in 2008

 |  Includes: DIA, QQQ, SPY
by: Dan Weiss

In my opinion, U.S. stocks will likely outperform the major developed foreign equity markets throughout the remainder of 2008 on a dollar basis. Below, are six reasons why I think this will be true:

1. Economics. The U.S. market is roughly 6 months ahead in terms of the housing and banking issues as compared to the U.K. and slightly longer than that over Continental Europe. We have just started to see the BOE begin to cut rates, however, the ECB seems to be much more concerned with inflation at this point rather than any slowdown in growth. I am most bearish on the major exchanges in continental Europe due to the higher interest rates despite significant signs of a slowdown which could lead to a significant slowdown or recession in the region. Japan has been weak economically for many years with brief periods of increased GDP growth which most recently has primarily been due to the strength in China. It is likely that China will slow from its 10-12%+ growth rates of recent years due in part to the slowdowns in the U.S. and Europe and China's attempts to better control growth. China will still likely grow in the mid to high single digits for the year, but this may not be enough to keep their very highly valued stock market at presently high levels.

2. Dollar. Weakness in the U.S. dollar has been a significant tailwind for U.S. investors who are buying securities overseas, however, in my opinion the dollar will climb in value over 2008 (especially in the second half of the year) as the U.S. economy begins once again to gain traction and the European economy falters due in part to limited action by the ECB.

3. Commodities. It has become clear that the U.S. economy is experiencing a major slowdown and potentially a soft recession. The Fed is actively adding liquidity into the marketplace which should allow the slowdown or recession to be mild and short in nature. Typically, the U.S. markets will begin to rebound about 2-3 months prior to the end of the recession. Commodity prices have traditionally been weak in periods of economic weakness as demand for items such as steel, coal and oil is driven lower. Some supply side issues may allow for some precious metals such as gold and silver to continue to exhibit strength, however, in commodities, prices should decline. The most questionable area at this time is commodities related to food as the ethanol boom has significantly increased prices of many food-related commodities over the past couple of years and farmers switch their production to more profitable areas.

4) Valuation. The U.S. market is now one of the least expensive markets on both a P/E and P/B valuation in the world. In addition, if the Fed were to cut by another 50 basis points in the next several weeks, we would be second only to Japan in having the lowest interest rates in the developed world.

5) Mean reversion. In the 5-year period that ended 2/7/08, the EAFE Index was higher by 19.6% on an annualized basis and emerging markets were up 34.3% against a return of 11.9% for the S&P 500 Index.

6) Increasing foreign investment. Over the past few months, we have seen several sovereign wealth funds invest in companies in the United States as they see significant value in many U.S. equities as compared to in other parts of the world.