A recent story on the daily peregrinations of the stock market concluded that, at least for the day, "U.S. stocks erased their losses to finish in positive territory, as investors weighed an improving domestic economy against heightened global concerns." That seems an innocuous enough statement. The markets did well because investor concerns about the economy were allayed by some data or shift in sentiment. Pretty simple, right? Yes, but also pretty wrong.
Reading markets in light of economic data is common, but it is using a deeply flawed lens. Not only can markets rise when the economy is weak and fall when the economy is strong, but the fate of an increasingly large number of companies has little to do with the fate of their home countries. Using national economic data as a barometer of companies and stocks may have once made sense when firms were intimately tethered to their homelands but no longer. In fact, using national economic data as a guide to how companies will perform is almost certain to lead to the wrong conclusions.
In part, this is because companies have become increasingly global in their business, especially publicly listed companies that trade on the world's stock exchanges. Nearly 50% of the earnings of the S&P 500 companies came from outside the U.S. last year, and if you take out companies that are closely tied to the American economy such as utilities and health care services, that percentage is almost certainly above 50%. Even some prominent, dynamic U.S. consumer companies like Nike are seeing their most dramatic growth by selling to China and its rapidly emerging middle class, along with a host of other emerging countries. The swoosh is as familiar in Guangdong province as it is in Galveston, Texas.
In fact, it is now easier to list examples of companies that aren't exposed to global trends than it is to tell stories of those that are. Yes, Universal Health Services, a $4 billion company that operates hospitals in the U.S., depends on local revenue, but that is increasingly the exception, rather than the rule, for the stocks that make up a typical investor's portfolio. Even an iconic though troubled American company like General Motors, which is about to relist its shares following a government bailout, is no longer so American or so iconic. GM sells more cars in China, accounting for about a third of its profit, than it does in North America.
The result of the decoupling of U.S.-listed companies from the U.S. economy is that corporate and national growth rates have also diverged. While the U.S. economy will be fortunate if it can eke out 2% to 3% growth this year and next, the S&P 500's third-quarter earnings grew by an astonishing 31% (year over year), down from an even more astonishing 51% in the second quarter. Granted, that was coming off a very weak 2009, but over the past decade, companies have on the whole grown much more quickly than the economy itself.
And this isn't purely an American phenomenon. After all, is NestlĂ© really a Swiss company, Siemens a German company it employs 60,000 Americans or Samsung a Korean company? Companies inhabit Corporate Land, which may not have a seat on the U.N. Security Council but surely exerts as much influence as any of the five permanent members do.
What this means for investors is that national economic data may be of little use. Using gauges like GDP, employment and sales to navigate investing decisions will lead to wrong decisions based on flawed assumptions.
Instead, investors should be guided by what those companies are, in fact, doing. Almost any publicly traded technology company today is enmeshed in global supply chains of production and consumption that treat the U.S. as one large market in a world of burgeoning markets. There's no better example than Corning, once a classic American company that made glass, then kitchenware, then fiber optics and is now a multinational that provides the core glass elements for flat-screen panels as well as laser technology.
So while there remain industries like health care that are inextricably linked to the domestic economy, those are the exceptions. The new rule for investing should be to put aside the quaint notion that getting the economy right helps you get stocks right. Once, what was good for GM might have been good for America, but that was another time, another age, one that should be remembered as history. And only as history.