Yankee Doodle Dandy

It’s the Fourth of July—time for fireworks, barbeque, apple pie and celebrating America’s independence. And a great time, in our view, to reflect on the year to date and think about what lies ahead.

2012’s first half was choppy as folks rehashed PIIGS fears and other widely discussed macroeconomic issues, but global stocks finished June in positive territory for the year. And we expect strongly positive returns in the second half. This may seem counterintuitive when headlines bemoan eurozone troubles, slowing Chinese growth and the US’s looming “fiscal cliff.” But news outlets have had incentive to promote negative stories since the dawn of print media—good news doesn’t sell papers. In our view, today’s headlines are likely more an indication of dour sentiment than the market’s future direction.

News that is both fundamental and underreported is what typically moves stocks. And there are plenty of real, positive fundamentals that are largely unnoticed—what follows is a mere sample of the good news you likely won’t see splashed across headlines:

• Corporations are very healthy—in the US and globally. Earnings and revenue growth continue apace, and corporate balance sheets are flush with cash (without much debt). There’s ample opportunity and incentive for firms to invest in new equipment, facilities, software, research and development, employees and the like—all of which can boost growth looking forward.
• The global economy, on balance, is growing and stronger than most assume. US, developed world and Emerging Markets GDP are at all-time highs. The eurozone remains weak, but history has shown the world overall can grow in the face of regional weakness.
• The US Leading Economic Indicator Index is high and rising. Though LEI’s not a perfect indicator, strength in components like new orders, capital goods orders and building permits is inconsistent with a soon-to-be-weak economy.
• Housing’s improved lately, and new and pending home sales trounced expectations in May to reach two-year highs. Homebuilders have worked through much of their excess supply, so even a modest pickup in sales from here could boost prices.
• Global trade is getting ever freer. The EU inked free-trade pacts with Peru and Colombia and progressed on a deal with India. China and Chile signed a strategic trade partnership and are eyeing a full free-trade agreement. Taiwan’s set to restart long-stalled free-trade talks with the US. And Trans-Pacific Partnership talks kicked off Tuesday—a long process, no doubt, but one that could remove protectionist barriers between North America and emerging Asia.
• By most measures, stocks remain very cheap while sentiment remains dour. Even a mild improvement in sentiment—like, perhaps, increased confidence the eurozone’s not falling apart—could provide a nice tailwind.

As always, negatives exist, but today’s negatives have been widely known for some time and thus likely aren’t powerful enough to counter underappreciated positives (though volatility could very well continue). So here’s to freedom, free markets and more bull market ahead.

Have a happy Fourth.