In an April 25th column on the Seeking Alpha web site, Nicholas Vardy made a hardy case for investing in global stocks. Indeed, there’s no denying that international markets have handily outperformed and outmuscled the U.S. stock market for the last 4+ years.
However, some of the exact circumstances that have led to foreign market dominance no longer exist. For instance, Mr. Vardy maintains that global stock prices are cheaper than U.S. stock prices when compared to earnings. This was true for the previous 4 years, but it is not accurate today.
In an earlier post, I compared the price-to-earnings (P/E) ratios for 7 of the highest-volume ETFs. Intriguingly, the second lowest P/E belonged to the S&P’s index of the 500 largest American companies.
iShares MSCI United Kingdom Index (EWU) 13.05
State Street Spider S&P 500 Index (SPY) 15.04
iShares MSCI EAFE Europe Index (EFA) 15.39
iShares S&P Latin America 40 Index (ILF) 15.48
iShares Pacific Excluding Japan Index (EPP) 15.88
iShares FTSE/Xinhua China 25 Index (FXI) 16.40
iShares MSCI Japan Index (EWJ) 19.62
Mr. Vardy also explains that the U.S. dollar’s decline is making foreign returns look that much stronger. The problem with this assertion is that, when making the case for continued global stock dominance, the explanation essentially assumes the dollar’s decline will continue indefinitely. That’s a prediction, and not a guarantee going forward.
Keep in mind, U.S companies operating overseas have benefited from the U.S. dollar’s decline, boosting their earnings and their share prices accordingly. In fact, if the U.S. dollar were to hold at its current levels, or even rise modestly, it would likely continue to fuel the U.S. domestic bull market run-up.
And then there are more benefits that a weak dollar, or modestly appreciating dollar, might create. U.S. exporters would benefit enormously. Foreign interest in U.S. mergers would rise, as would tourism. In brief, the steady, consistent growth of the U.S. economy would continue to boost domestic equities, whereas unrestricted growth of a number of emerging regions may fuel inflation.
Let’s be clear… I am a big believer in the economic expansion across the globe; in fact, I’ve spent many years living in countries like Taiwan and Hong Kong, China. That said, when one looks in the rear view mirror to explain why European, Asian and Latin American stock markets have been so profitable, unwary investors may go on an ill-advised "performance chase."
If sectors can shift (e.g., real estate to utilities, etc.), and if small-cap dominance can give way to large-cap brilliance, it’s not a stretch to consider the possibility that U.S. equity markets may return to the top spot. The smart move is to invest in the U.S. and abroad, while maintaining a strong discipline for protecting against a big downturn in any investment.
Disclosure statement: Some of Pacific Park’s investment clients may hold positions in any of the investments mentioned above.