The World Economy

Posted in: Economics, General, Stock Market, Thought of the Week

The S&P 500 equity index is regarded as the de facto barometer for the U.S. equity market and often a proxy for the health of the U.S. economy. Over the past two decades, the companies that comprise the index have uniformly diversified their revenues by increasing exposure to Europe, Middle East, Africa, and Asia.

The revenue breakdown of the S&P 500 index shows that approximately 66% of sales originate from within our borders – hardly a true representation of the U.S. economy! Some of the largest companies on the S&P 500 derive up to 50% of their sales from Europe, Middle East, Africa, and Asia. If we were to compare these data to two or three decades ago, we would see a material rise in the geographic diversification of revenues.

The primary driver of this trend has been a reduction in government protectionism in various countries, particularly emerging markets, in conjunction with technology driving down the cost of doing business. In doing so, economies are becoming more open, and subsequently, facilitating more trade. This means that investors must pay attention to the events transpiring outside the U.S. that could potentially impact companies on U.S. exchanges.

Given such lackluster returns in U.S. government and corporate bonds, investors began to funnel cash not only into U.S. equities, but also investments in emerging markets in search of a higher rate of return. As a result, emerging markets quickly became a “crowded trade”, or one where investors act identically until asset prices inflate to the point where they can barely go further. Back in late May through mid-June, the MSCI Emerging Markets index sold off steeply because investors were spooked over fears that the Fed may begin tapering their Quantitative Easing (QE) bond-buying program unexpectedly.

The impact on many of these emerging economies was quite severe, in some instances even forcing their own central banks to attempt to stabilize their currencies and markets. It is interesting to see that U.S. Fed policy has the ability to impact markets across the globe, and another example of our continued shift to a world economy. Investors will need to expand their analysis to include a more global perspective in order to properly assess how trends worldwide will impact their forecasts and security selections.

Read this week’s Thought of the Week to learn more about the shift towards a world economy.

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As an Investment Advisory Representative working in conjunction with Global Financial Private Capital (GFPC) we are provided weekly thoughts on what is happening in the economy and the market. Written by our investment committee at GFPC we find these thoughts to be informative and interesting.