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Strength in Numbers: A Golden First Half for Global Stocks

by Jim Bell, CFP®, President and Founder, Chief Investment Officer

July 2017

By no means am I an authentic basketball fan. For example, I do not under-stand a pick and roll. But our Oakland office at 11th and Broadway is directly across the street from the Golden State Warriors’ headquarters and practice court atop the Oakland Convention Center. Occasionally we see Warriors in restaurants and crossing the street, and when the Warriors won the NBA Championships in 2015 and 2017, the victory parades started right at the corner of our building. I have enjoyed getting swept away in Warrior fever, even though I cannot explain pick and roll.

Taking Stock of Basketball

As I was reading the July 1 Wall Street Journal headline article, “Global Stocks Cap Strong First Half,” I thought of the Warriors and their team motto, Strength in Numbers. 26 out of the 30 indices that measure the world’s highest value stock markets gained ground in the first half of 2017. Such synchronized results have not occurred since 2009. I will just observe that 26 out of 30 is not as good statistically as the Warriors in the 2017 playoffs winning 16 of the 17 games played.

Compounding Growth

For me, teamwork and competition in basketball share similar dynamics with global stock markets. When one economy and market does better, or a group of economies and markets do better, it can help all economies and markets do better. I think of it as a super-compounding effect. In the 2016 NBA Finals, Golden State was ahead of the Cleveland Cavaliers by three games to one. The Warriors needed only one more win to clinch the championship. It did not seem possible, but the Cavaliers came roaring back winning the final three games in a row and the championship. My nine-year old granddaughter, Sofia, was devastated.

Compounding Performance

The Warriors needed to play better in the playoffs, so in the off-season they signed super star Kevin Durant (KD) from the Oklahoma City Thunder; KD has had a compounding effect on the positive performance of the whole Warriors team. Even Draymond Green, the Warriors’ self-control-challenged power forward played in all five games against the Cavaliers without being suspended as he was last year. In the playoffs this year, the Warriors won 12 games in a row against three different teams to get to the finals, and the competition that the Cavaliers brought made the Warriors play even better.

 

Growing Demand

This performance-compounding effect is going on in the world economies and markets as well. In the first half of 2017, foreign markets from South Korea to India to Spain produced double-digit gains. With demand growing in these markets, it spreads to other markets including the US, which grew in the single-digits. Strong corporate earnings are fueling the synchronized rally around the world. First quarter earnings in the US from the S&P 500 grew by 14% compared to Q1 last year; Asia and Europe on average also grew by double-digits.

Changing Strategies

Worldwide support from central banks has also helped fuel this rally with low interest rates (easy money). But now, the US Fed has raised interest rates four times in this cycle, and American businesses have integrated these increases just fine. The Fed is moving at a slow and measured pace to normalize interest rates, always studying economic data for guidance. I believe that investors overreact to central banks when they talk about slowing and ultimately reversing easy money policies. The US economy is a good example of the capacity to weather rate increases and continue to grow. The European Central Bank is now signaling that it may synchronize with the US Fed in starting to normalize interest rates.

 Keeping the Team Together (or Not)

 

Following the Warriors blowout victory over the Cavaliers, there has been much talk among players, managers, and fans about keeping the team together. The July 4 headline in the San Francisco Chronicle announced that Kevin Durant has put team above self by taking a pay cut to help keep the team stay together. This is truly Strength in Numbers by amplifying team above self. It also shows up in the way the Warriors play together; they are unselfish in the way they pass the ball, thus realizing the strength in their numbers. Often, grace and gratitude are palpable on the court, a rare experience in modern day sports. In Europe, Emmanuel Macron’s election in France has gone a long way in keeping the European Union team together. But it is more often that a team roster changes. When the global markets lose the easy money policies of central banks, I believe it will be good economics and good business. Sometimes when a team roster changes, the team realizes it has the resources to move forward stronger.

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