With significant risks still posing a threat to the global economy, bears find themselves scratching their heads as equities continue to roar higher. In a previous article, I pointed out how U.S. equities are outperforming other risk markets, including oil and the euro, and it seems as though this relationship is going to continue. In other words, if you are bearish on the global economy, don't short U.S. stocks. I believe there are many other viable markets to use to effectively bet on a continued global economic slowdown. Beforehand, let us review what economic conditions are driving financial markets today.
Financial Market Theme and Conditions
With Europe's continuing debt crisis causing continued outflows out of PIIGS' bonds and equities, newly tied up capital is being allocated into safer assets, in more relatively stable nations. Global investors continue to be wary of recent data released showing job creation around the globe continuing to stall, as demand for goods slows down. China's recent GDP number also showed a continuing slowdown in Asia, further emphasizing the rough patch. Altogether, it would be safe to say that global economic conditions have been deteriorating over the last few months, specifically in Europe and Asia. This flow of money (from riskier geographic locations to the United States) is a large contributor to the outperformance of U.S. equities, as outlined below.
Why U.S. Equities Will Continue To Outperform
In my opinion, there are two major reasons why U.S. equity markets should continue to outperform in the near future. These reasons are:
1. Capital flight to the United States - As Europe and Asia continue to have their respective problems, global investors find themselves allocating their capital into the United States, whether it be risk markets (equity & corporate debt) or quality (treasuries & the dollar).
2. Federal Reserve support - Market participants as a whole still believe that another possible round of quantitative easing will bring support and confidence to American equities (my opinion on the matter here), and investors continue to buy stocks on that notion (as exemplified by the past few days' rallies in stocks).
Due to my reasons listed above, and the continued confirmation of my hypothesis by recent action in financial markets, it is my opinion that U.S. stocks will continue to outperform other risk markets. If you are bearish on the global economy, the best way to express that view would be to initiate bearish positions in heavily consumed commodities such as oil (USO), copper (JJC) and steel, which could be expressed through U.S. Steel (X). These commodities do poorly during slowdowns, as less demand for goods (manufactured from commodities) are observed. Should the global economic worries highlighted above continue to be persistent, these markets should under perform U.S. equities (SPY).
Disclosure: I am short oil and copper, however my positions can change at any time, on a frequent basis.