China’s economy is in trouble
China has long been the engine of global growth.
But in recent weeks, its economic slowdown has alarmed international leaders and investors who are no longer counting on it to be a bulwark against weakness elsewhere. In fact, for the first time in decades, the world’s second economy is itself the problem.
Hong Kong’s Hang Seng (HSI) Index slid into a bear market on Friday, having fallen more than 20% from its recent peak in January. Last week, the Chinese yuan fell to its lowest level in 16 years, prompting the central bank to make its biggest defense of the currency on record by setting a much higher rate to the dollar than the estimated market value.
The issue is that, after a rapid spurt of activity earlier this year following the lifting of Covid lockdowns, growth is stalling. Consumer prices are falling, a real estate crisis is deepening and exports are in a slump. Unemployment among youth has gotten so bad the government has stopped publishing the data.
“We downgrade China’s real GDP growth forecast … as the property downturn has deepened, external demand has weakened further, and policy support has been less than expected,” UBS analysts wrote in a Monday research note.
Researchers at Nomura, Morgan Stanley and Barclays had previously trimmed their forecasts.
That means China might significantly miss its official growth target of “around 5.5%,” which would be an embarrassment for the Chinese leadership under President Xi Jinping.
https://www.cnn.com/2023/08/21/economy/china-economy-troubles-intl-hnk/index.html
Emerging markets are a gamble. VXUS doesn't include them. A small part in Taiwan, depending on whether you view them as China or not, and Hong Kong. Diversity for the win.
Stock market drives U.S. households to record wealth
https://www.reuters.com/markets/us/us-household-net-worth-hits-record-2nd-qtr-fed-says-2023-09-08/
Good article in this weeks Barron's:
Gabriela Santos, global market strategist at J.P. Morgan Asset Management, says this is an excellent time for U.S. stock investors to shift money to overseas markets. Prices are attractive. The iShares MSCI Eurozone EZU –1.44% ETF (EZU) traded recently at 12 times this year’s projected earnings, and the iShares MSCI Japan EWJ –0.65% ETF (EWJ), at 16 times, versus 20 times for the S&P 500 SPX –0.14% index of U.S. stocks. The U.S. dollar, following 14 years of strengthening, could give up ground to the euro and the yen, adding to overseas returns, says Santos. There has also been a shift in corporate behavior abroad. “Europe and Japan have discovered the secret sauce of buybacks as something that not just mechanically improves earnings per share, but also something that at the end of the day is rewarded by shareholders,” says Santos.
Even U.S. stocks could continue shining. This past week, BofA Research predicted a further 4% gain from here for the S&P 500 by year’s end. Higher yields aren’t necessarily an impediment; the bank points out that from the mid-1980s to 2008, real rates were more than a point higher than now, and stocks returned 15% a year. Also, companies, unlike bonds, can always make changes. Meta Platforms (META) this year announced cost cuts and stock buybacks, and projections for its earnings per share have climbed from about $8 to over $13.
What makes the S&P 500 relatively expensive, of course, are puffed-up valuations for seven technology companies with outsize index weightings. BofA is particularly bullish on the equal-weight version of the index, like the one underpinning the Invesco S&P 500 Equal Weight ETF (RSP). It recently traded below 16 times this year’s projected earnings.
The valuation gap between the equal-weight index and the top seven stocks in the regular S&P 500 is the widest since the late-1990s dot-com stock bubble, says BofA. Plus, the second quarter seems to have marked a trough in the current earnings cycle, and the recovery part of the cycle, which we might be in now, tends to favor the value tilt of the equal-weight index.
https://www.barrons.com/articles/fed-interest-rates-stocks-bonds-ec0ae56e?siteid=yhoof2
What do you all think of Invesco S&P 500 Equal Weight ETF (RSP)??
IMF outlook worsens for a ‘limping’ world economy. Mideast war poses new uncertainty
The IMF sees global consumer price inflation dropping from 8.7% in 2022 to 6.9% this year and 5.8% in 2024.
The United States is a standout in the IMF’s latest World Economic Outlook, which was completed before the outbreak of war between Israel and Hamas. The IMF upgraded its forecast for U.S. growth this year to 2.1% (matching 2022) and 1.5% in 2024 (up sharply from the 1% it had predicted in July).
The U.S., an energy exporter, has not been hurt as much as countries in Europe and elsewhere by higher oil prices, which shot up after Russia invaded Ukraine last year and jumped more recently because of Saudi Arabia’s production cuts. And American consumers have been more willing than most to spend the savings they accumulated during the pandemic.
Things are gloomier in the 20 countries that share the euro currency and are more exposed to rising energy prices. The IMF downgraded eurozone growth to 0.7% this year and 1.2% in 2024. It actually expects the German economy to shrink by 0.5% this year before recovering to 0.9% growth next year.
That’s below even Russia’s economy, which the IMF predicts will expand 2.2% this year before dropping to 1.1% growth next year.
https://apnews.com/article/world-economy-imf-inflation-ukraine-war-3dadc913c17dc22cb637976dba49fcc3
Is this what you are talking about?:
Product Details
Invesco S&P 500® Equal Weight ETF (RSP) is based on the S&P 500® Equal Weight Index (Index). The Fund will invest at least 90% of its total assets in securities that comprise the Index.
- The Index equally weights the stocks in the S&P 500® Index.
- This approach results in an exposure that tilts toward smaller companies in the S&P 500 Index.
- Relative to market cap indexes like the S&P 500, this reduces the concentration risk.
- RSP and the Index are rebalanced quarterly.
How does it compare to FZROX (Fidelity ZERO® Total Market Index Fund)?
@pizzaman The Barron's article you cited was comparing (cap weighted) SP500 (e.g. SPY) to equal weighted SP500 (RSP)....hence the perf chart I sent.
For the longest period available on Stockcharts (starting about 5/1/2003 = about 5150 days), the performance as of 10/10/23 is:
RSP: 625.91% (exp ratio = 0.20%)
SPY: 597.41% (exp ratio = 0.095%)
You now mention total market (mutual) funds, which are composed from a different stock universe (has a portfolio of thousands of stocks).
Attached compares the performance of FZROX, FSKAX, VTSAX, and VTI (Vanguard total market etf)
For the longest comparison period available on Stockcharts (starting about 8/1/2018 = about 2570 days, FZROX limits the horizon as it is relatively "new"), the performance as of 10/11/23 is:
FZROX: 62.49% (exp ratio = 0.00%)
FSKAX: 61.19% (exp ratio = 0.015%)
VTSAX: 61.42% (exp ratio = 0.04%)
VTI: 60.33% (exp ratio = 0.03%)
Applying a similar (shorter) comparison period for those SP500 etfs mentioned above, one gets the following
RSP: 154.23%
SPY: 206.36%
@wallace471 Thanks for the in depth analysis ????. I threw in FZROX because 80% of the stocks contained in most total US market funds are comprized of the same components of the S&P 500 with the remaining 20% mid and small cap. RSP does a little better than SPY I assume because of the smaller cap stocks and less reliance on the top 7. About 20% of FZROX is in mid and small cap stocks, so I think it is similar in performance to RSP. At the end of the day the investment that makes me the most money (risk adjusted) is what counts.
@pizzaman This link may be of interest as far as an SP500 fund comparison:
https://www.physicianonfire.com/fnilx-vs-fxaix/
@pizzaman And here is the link for their recent comparison of those Fidelity total market funds:
https://www.physicianonfire.com/fskax-vs-fzrox/
Why the US economy has powered ahead of other rich nations
Gross domestic product in the United States grew at a remarkable 5.2% in the third quarter, ahead of China, long the engine of global growth.
“The US has really outperformed relative to other countries for the past year,” Innes McFee, chief global economist for Oxford Economics, told CNN.
The United States has powered ahead of the European Union, the United Kingdom, Japan, Canada and other advanced economies this year.
Last month, the Paris-based Organisation for Economic Co-operation and Development became the latest intergovernmental body to upgrade its forecasts for US growth this year and next, while downgrading the outlook for the 20 countries that use the euro currency.
The immediate explanations for the disparate fortunes of the world’s most advanced economies are differences in energy prices, pandemic-era stimulus and the pass-through of higher interest rates.
But there are also longer-term, structural factors playing into the divergence, which give the United States the upper hand. Even so, the US economy is widely expected to grow at a much slower rate in the final months of the year as pandemic savings dwindle and borrowing costs remain at a 22-year high.
...longer-term, the picture looks brighter and could further cement America’s lead over Europe in the coming years.
President Joe Biden’s Inflation Reduction Act, which is set to channel $369 billion toward clean energy projects, could attract even more investment into the United States, already one of the best places to raise capital globally.
In artificial intelligence alone, cumulative venture capital investment in the United States reached nearly $450 billion over the past decade, according to OECD data. That’s more than double the AI investment in China and nearly 10 times that in either the European Union or the United Kingdom.
A concentration of innovative tech companies and a rapid uptake of new technologies have helped the United States notch strong productivity gains, especially as compared with Europe and the UK, said Andrew Kenningham, chief Europe economist at Capital Economics.
And with the United States poised, according to Kenningham, to make the most of developments in AI, that gap could widen.
https://www.cnn.com/2023/12/07/economy/us-economy-china-europe/index.html
I think much of the recommendation by the big houses (Vanguard et al) to lean a bit more heavily on developed international index was due to their belief we'd have a recession due to aggressively reigning in inflation. Also possibly thinking the Ukraine war might end sooner and the rebuild beginning. Neither happened (so far) and Biden's team have really threaded the needle with this soft landing and big economic growth. That said, it's always good to have some diversity and investment in those great ex-US companies (Nestle, Toyota, the pharmas). You never know what's on the horizon.
@Hines, Can you provide the document where Vanguard makes the case that you describe. I recently read Vanguard's 2024 Market Outlook and did not walk away thinking that the forward thinking has changed much.
@ all, here is a video showing the approach I prefer when I estimate forward returns for various asset classes. This video is building a case for international diversification but if you sign up for Asset Camp, you can do your own analysis.
https://www.youtube.com/watch?v=mhCJTWYkixY
