How Export-Led U.S. Growth Could Provide Fuel for Equities

The Great Recession was marked by a dearth of credit, but it never lacked for buzzwords. The aftermath of a crisis bought on by "too big to fail banks" was an era of greatly muted growth, or a "new normal" as bond fund king Bill Gross coined it.

Now, with the "snowicanes" (or snowmageddons or snowpocalypses) that battered the East Coast melted away and a more bullish attitude building, another phrase -- the "new mix" -- is making the rounds. And despite the understandable impulse to cringe, investors should pay attention. If the new-mix view materializes, it could propel the markets in the months to come.

The now widely accepted "new normal" philosophy holds that the keystones to the U.S. economic outlook are sky-high unemployment and heavily indebted U.S. consumers who are focused on more reducing their liabilities than on spending. In contrast, the "new mix" theory holds that U.S. growth will now be fueled in much larger part by exports, AllianceBernstein analyst and "new mix" proponent Joseph Crason argues.

Tapping into overseas demand will allow the U.S. to deliver a growth rate of 3.7% this year and about 3.5% in the years after, according to this view. That would paint an entirely different picture of the economic landscape than many investors anticipating the "new normal" of 2% have been bracing for. Their strategy for dealing with this scenario has been to pile into bonds at record levels.

Rescued by Emerging Markets?

Of course, Crason is hardly the first analyst to take issue with the anemic outlook put forward by Gross and his camp. Some Wall Street stalwarts have been calling for much headier growth on the assumption that the best predictor of an economic recovery is the severity of the downturn.

But the "new mix" view goes further because it pinpoints where that growth will come from even as it acknowledges lackluster domestic demand. And with the impressive expansion in emerging economies, the case seems increasingly credible. After all, China is already growing at rates above 10%, and Indian officials recently indicated they expect an expansion of above 8%.

The prospect of robust growth overseas stands in stark contrast to the malaise that set in amid the credit crisis. Before the sharp downturn, some analysts had argued that "decoupling" -- a buzzword meaning that emerging economies could grow because of internal demand even if the developed world got caught in a downturn -- would help soften the blow and shore up global demand.

But as investors fled risky assets like emerging markets while the credit crisis roared, the idea of a decoupling seemed to be debunked. At that point, decoupling seemed like more of Wall Street's wishful thinking, akin to the idea that exotic financial instruments had managed to contain risks.

Going to Where the Growth Is

Now, however, with major emerging economies again showing robust growth, it seems that the concept of decoupling may have been a victim of undue pessimism. Indeed, the International Monetary Fund currently expects emerging markets to expand at 6% this year compared to 2.1% for the developed world.

U.S. companies already look overseas for about half their revenue, so if they're able to take further advantage of the blistering growth in some emerging economies, the U.S. stock market could be in for a further boost.

One argument against equities rallying much further is that equity mutual fund managers may already be close to fully invested. Cash on hand dropped to 3.6% from 5.7% in January 2009 in the fastest drawdown since 1991 amid a soaring market. And that does present a hurdle for the market.

Bu it doesn't mean cash to fuel a rally isn't available. Recall the record $357 billion that battered investors poured into bonds last year, more than five times the prior five years combined. That money may have to find a new home amid stronger-than-expected growth and the prospect of rising interest rates.

And the U.S. stock market, with its exposure to the heady growth in emerging economies, could be a top candidate for where that cash could relocate. As Wall Street's latest buzzword's battle it out, investors would be wise to look beyond the sound bites. Evidence of what they stand for ultimately trumps their snappiness.