The U.S. economy is growing only moderately and the job market remains sluggish, but stocks keep roaring ahead -- and they should. American companies are fundamentally undervalued, and unless upheavals in the Middle East or a European debt crisis derail global growth, the Dow is headed for 13000.
Growth in the range of 3-3.5% in the United States and about 10% in China is great for U.S. equities. American companies may not add employees in large numbers, but they can boost profits with only moderately expanding domestic demand thanks to breakneck productivity advances. And America's larger companies -- those on the S&P 500 -- earn about half their profits abroad, where they are poised to win big.
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Investors should rebalance toward U.S. equities. Don't abandon emerging markets but put new money into U.S. companies with global reach.
American companies that bring together multiple technologies -- such as General Electric (NYSE:GE) and IBM (NYSE:IBM) -- complex expertise, such as in investment banking, construction and engineering and natural resources, and more focused technology companies that are part of complex virtual networks -- like AMD (NYSE:AMD) and CISCO (NASDAQ:CSCO) -- are poised to reassert U.S. competitiveness.
Healed from the recession, those companies are prepared to exploit profit opportunities in a moderately growing U.S. economy and rapidly growing Asia.
The structure of the U.S. private economy is changing -- not necessarily toward more services, as that is largely played out. Investors should not be alarmed that housing is not recovering -- the country has enough unsold homes to last several years.
Industrials that don't use a lot of labor in production have abundant opportunities, and supporting industries in software, logistics, etc. all look bright. That's why manufacturing, led by the auto sector, is stronger and finally adding some jobs.
As long as China grows anywhere near 10% and the U.S. at least 3%, don't worry about U.S. equities being overvalued until the Dow hits 13,000, and maybe not even then depending on what happens during that journey.
The Obama Administration has made the U.S. economy irrelevant to large American businesses playing on the global stage. It lacks the nuanced understanding of business and globalization possessed by the Administrations of William Clinton and George H.W. Bush.
Eloquently pronouncing whichever nation succeeds in green industries will win the future does not make it true. Those activities are too small and will stay too small, in terms of shares of GDP and employment, to base the prosperity of a $15 trillion economy. The United States is not Switzerland but a continental economy--niche industries and finance are not enough. Abandoning main line industries for solar panels and fanciful, money-losing high-speed rail is folly.
Bill Clinton and the elder Bush did not seek to micro manage industry with telephone book-sized instructions on how to value a home or make a bottle of ketchup. Instead, they set goals for sound practice. What the Obama administration fails to grasp is the BP mess in the Gulf was caused by corrupt government regulators -- not the absence of impossible licensing requirements -- and the financial crisis was a failure of too much bad regulation. Sarbanes-Oxley, with its onerous and costly requirements, did not keep the big banks from fooling Treasury that the Structured Investment Vehicles were no threat.
President Obama's regulatory reform task force is charged with ridding the country of irrelevant regulations, which are hard to find, and not reforming the overly burdensome and ineffective approach taken in recent years.
With the administration tone deaf, big American companies are simply taking their show on the road and investing abroad. When Washington gets realistic about the costs and disadvantages its policies impose (health care, currency strategy toward China and mindless, as opposed to necessary and well crafted, regulation), U.S. companies will start creating jobs in America again. In the meantime, they will employ minimal labor here, go abroad and send profits home.
Peter Morici is a professor at the Smith School of Business, University of Maryland School, and former Chief Economist at the U.S. International Trade Commission.