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Buying into global growth

America’s recovery from the Great Recession is the first to be driven not by domestic consumer spending but by growth in the developing world. Recent analysis of the Standard & Poor’s 500 companies by the Wall Street Journal underscores how corporate America has gained since the recession, reaching record profits on greater productivity and lower debt.

At the same time, U.S. employment and housing plod far behind 2007 levels, and the economy overall has expanded only at a grudging pace. The International Monetary Fund recently forecast U.S. growth of 2.1% in 2012 and 2.4% in 2013, vs. a global rate of 3.5% this year and 4.1% next year.

In an interview, Art Rothschild, vice president of Landaas & Company, said the seeming disconnect between U.S. economic growth and the global expansion fueling corporate profits is something more investors need to understand.

Money Talk: How do you reconcile for investors that companies are doing well and yet consumers aren’t necessarily experiencing it?

Art Rothschild: The big companies in the S&P 500 have recovered, but most people don’t feel that because they basically haven’t.

They don’t understand the fact that the global economy is expanding and the domestic economy, although growing, isn’t going to expand at nearly the global rate. The old America is gone.

Money Talk: What do you mean by that?

Art: Because the growth of the global economy is really happening overseas, the jobs are being created overseas. Those are the people who are going to have paychecks. Companies that produce the goods and services that those people are going to buy are going to make more profits, but we Americans don’t get those paychecks.

If we want to participate in that growth, we can buy stock in the companies that are going to profit from the labor of those individuals overseas. It’s not going to be creating as much individual wealth in this country – unless you’re a shareholder. But the workers aren’t going to make as much money.

The old economy, in which a worker could go to work for a brewery or an auto maker and expect to get the company to take care of them for life, with health care and pensions – the dollars just aren’t there anymore.

Money Talk: Do you see this as a temporary shift?

Art: I really don’t know where the growth is going to come from in this country, but the global growth picture is very clear.

GE announced last year that it’s going to move its medical imaging headquarters to China because that’s where business is growing. That’s what companies do. They dedicate resources or develop or spend in locations that are expanding.

The S&P companies have more employees than they had in 2007. They just aren’t here. I don’t know why that pattern would change. It’s going to be more competitive for American workers.

Money Talk: What does that mean for investors?

Art: Last year was such a strange year. Bob Landaas talks about it being the only year he can remember in which corporate profits went up double digits and the stock market didn’t.

What we learned from last year is that we really, really, really have to have a long-term perspective in order to be successful investors. If we’re going to have years in which the markets can be distracted by politics, which happened last summer, and distracted by problems in Greece, then we really have to understand why we’re buying what we’re buying.

The miracle of this recovery is that we’re recovering from the biggest recession since the Depression. Three years later, the stock market is up 100%.

Expect companies to continue to make money over the long term.

Money Talk: How do you convey that to your clients?

Art: We have to constantly tell our clients that they’ve got to be wary of what the news media’s talking about. Investors have to filter the economic news. Don’t let bad news of what’s been happening in this country get you down.

We don’t have to be doing well in this country to be making money globally.

This has been a tremendous global economic expansion that’s going to continue. The excuse that companies have had for laying people off has given them an opportunity to shutter businesses in places where they aren’t as profitable and put them up in places where they can be more profitable. They become more efficient.

If you’re going to participate in that, you’ve got to be buying stocks.

Money Talk: And yet, for the most part, institutional investors – not individuals – have been engaged in the doubling in the market value in the last three years. Why?

Art: People want to buy when prices are going up. They aren’t interested when prices are going down.

People need affirmation. Affirmation comes from rising markets. At some point, people are going to slough off the bad news, as long as they expect better news to follow.

This time of year is when people put money into their IRAs or their Roth IRAs. Those contributions seem more plentiful this year. Now, we have very enlightened clients, but I had more people tossing money into their accounts. It’s not huge amounts, but it’s constant. People are more enthusiastic. It’s confidence.

They understand. The strongest part of this global economic puzzle is corporate profitability. That’s something that American investors can participate in.

initially posted April 25, 2012

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