Strategas Research has compiled the year-to-date (through January 25) returns of major global equity markets. They point to Hong Kong and Brazil as the leaders, with returns YTD of around 10%. Of the others in the largest 20 markets, only two, Australia and the UK, were slightly negative. For reference, the United States was about 6% positive in the same time period. Strategas notes that this upward path occurred in the face of a rising trend in interest rates worldwide, US dollar pressure, and a rising gold price.
Strategas’ excellent research is a regular component of our reading list. They like the banks and the energy patch. So do we – both sectors are overweighted in our US ETF portfolios. We anticipate that will continue, but we must remind readers that our clients know our position can change at any time.
A geographical issue that was surfaced by Strategas caught our attention. They compared the returns of S&P 500 companies headquartered in Florida with those of S&P 500 companies headquartered in Illinois. They used the last decade as the reference period, so the starting time is January 1, 2008, in the thick of the financial crisis. In this piece of research brilliance, Strategas used equal weighting for performance measurement. The idea behind equal weighting is to look at the companies on a relative basis and not have a single dominant large company distort the comparison. Their surmise is that companies in states with “more favorable operating environments” will have relatively better share price performance (suggesting better earnings).
During the decade, Florida-based companies had a relative outperformance of about 50% over the companies in Illinois. That is a spectacular observation. We can argue about why the disparity occurred. Illinois critics point to budget failures, high taxation, and poor state debt management. But Florida’s critics talk about hurricane risk and major coastline issues, including rising sea levels. So the debate about the Illinois–Florida comparison is a multidimensional one.
Let’s set aside the debate over “why” and just draw an inference based on performance. Clearly Florida outperforms Illinois, suggesting that Florida is likely to be a preferred destination for businesses – and there is little likelihood that will change. The trend seems to be strongly embedded.
The new tax bill may work to widen the divide among states. The alteration of state and local income and real estate tax deductibility hits the executives of companies, their managers, and their employees. Over time, decisions will favor states that offer economic incentives. Thus we can expect an acceleration of migration from poorly performing states to the better-performing ones. It is not just Florida. For example, there are reasons that Utah is booming. And there are reasons that some states are barely staying even while the United States as a whole is undergoing an economic recovery.
That poor relative performance has implications for the creditworthiness of those states. Cumberland’s muni research team is tracking those states closely.
Yes, geography matters a lot. Whether globally or domestically, it is a factor in investment decisions or should be for any market agent willing to do the work. We congratulate Strategas Research for creating an index of corporate performance by state and using it to compare relative results.
David R. Kotok
Chairman and Chief Investment Officer
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