Each January, except in a year following a general election, the US president delivers the State of the Union address.
It usually involves the president saying, ‘The State of the Union is strong’.
They’ll say it’s strong even if the Union isn’t strong.
So as we begin the approach towards the middle of this year and investors wonder if now is the time to buy stocks, we’ll ask about the State of the Market.
Is the market strong? Let’s see…
There is no simple or single way to measure the ‘strength’ of the market.
You can’t put it on a scale.
You can’t get it to bash something with a hammer to see if the bell rings.
And you can’t get it to pump iron to prove that this market is the most manly and strongest market of them all.
So what can you do? Can you look at the economy? Will that give you a clue? Not really…
The stock market and the economy aren’t the same thing
It’s important to remember a key thing about investing.
The economy and the stock market aren’t the same thing.
A simple way to think about the difference is this.
The economy is what’s happening now.
On the other hand the stock market is what investors think the economy will do in the future.
Does that make sense?
When you think about the economy you should think about businesses, consumers, manufacturers, retailers, and service providers.
It’s everything that involves the interaction of one group of individuals with another. It’s what they’re doing today.
But that’s not the stock market.
Sure, the stock market involves the interaction of individuals. And like the economy, the stock market has buyers and sellers.
But unlike the economy the stock market isn’t about what’s happening today. The stock market reflects what investors think will happen in the future.
It’s for that reason that, unlike many other folks, we have a relatively positive outlook on the future.
We’re not saying the future will be perfect and without problems. That wouldn’t be reasonable. But what we are saying is that throughout history the world has faced many problems. But thanks to the ingenuity of humans, things have generally turned out fine.
Not great, but getting better
That thought in itself can be dangerous.
It can lead people to think that they can do absolutely anything and things will be fine.
That’s only true until it isn’t true.
Arguably the whole subprime mortgage mess during the 1980s through to the late 2000s was a big part of that. Those creating the toxic assets figured that it didn’t matter what they did because the government would ultimately bail them out.
Boy, did they get that right.
The government did bail them out. And although it wouldn’t be fair to say things are back to normal, it would be fair to say that for most people things are looking better.
That’s perhaps with the exception of the one in five Americans currently on food stamps.
But that’s today. Isn’t it possible that things could gradually improve in the future? And if so, doesn’t it make sense to invest today in anticipation of future improvements?
It makes sense to us.
So how do we see the future?
You don’t need high growth for a boom
As we’ve mentioned, we have a positive outlook.
And it’s for one key reason.
As we look at it, China’s economic growth path is only beginning. That may seem a strange view considering the rapid growth over the past 20 years.
But the reality is that China is shifting from an emerging market economy into an emerged market economy. This is where we see parallels with the US economy at the turn of the 20th century.
The assumption by many analysts is that now China isn’t growing at 8% or 9%, the economy will collapse and there won’t be a major driving economic force in the world.
We don’t believe that for a second. And we’ve got history on our side too. Look at this chart:
As you can see from this chart, the average annual gross domestic product (GDP) growth for the US between 1948 and 1989 was around 3%.
This period coincides with what you could call the ‘Golden Age’ of American living. It was when the US ruled the world as both a manufacturer and a consumer of goods…all with a 3% average annual growth rate.
China’s GDP growth rate at the moment is 7.5%.
You see, in terms of where China is on the economic growth chart, it hasn’t even reached 1948 yet. And yet we’re supposed to believe that this economic behemoth has already peaked and that’s it’s only downhill from here?
We don’t buy it.
Yes, China may have peaked in terms of the economic growth rate, but it’s nowhere near peaking in terms of total economic growth.
That’s yet to come.
And that’s exactly why we’re backing China to take over as the world’s largest economy in the near future. It may not happen this year or next year, but it will happen.
When it does it will have a huge and disruptive impact on the world economy, and Australia stands to be right at the forefront to take advantage of it.
In short, you’ve got two options to play the growth of China. You can either stand by and watch it all happen. Or you can be an active part of it by investing in the companies and industries set to gain the most.
We know what we prefer. We hope you take the same view.
Cheers,
Kris+
Two stories from Money Morning this week…
This week I wrote about why some people are particularly miffed at the fact that we offer a 30-day money back guarantee on our paid investment advisories. For many people who don’t subscribe that’s not enough. They don’t want to pay a cent for the valuable investment analysis we provide. In Monday’s Money Morning I explained why a small annual membership fee for one of our best investment advisories really is a small price to pay for taking part in this impending bull market.
In Wednesday’s Money Morning I explained that much of the ‘market crash’ talk was overdone. I explained that there were signs in the market to suggest that another boom is on the way. It’s early days, but these are the signs that make me positive about the future for stocks.
And this…
Introducing Money Morning Premium, the most important change to your Money Morning service that we’ve made in a long time. Click here for more details…
