Is the Tide Turning?

It is still early in the year and we don’t make predictions. But one asset class in your portfolio, which has been in the penalty box for a long time, is currently outperforming the U.S. market. This asset class represents foreign developed stock markets.

It has been many years since these markets have outperformed the U.S. market, but one lesson market history has shown us is that nothing stays in the penthouse forever. And there has been plenty of instances where a group goes from the outhouse to the penthouse, and vice versa. And we believe it is impossible to time these changes.

Companies in the U.S., primarily technology-oriented companies, have had faster earnings growth than many of the companies headquartered overseas. While true, we have also seen the valuation of U.S. stocks become significantly higher than most overseas markets.

But with valuations significantly cheaper in most overseas markets, we seem to be witnessing money looking for bargains by moving into less expensive markets, even if they do not offer the same growth rate of companies here.

Below is a chart showing the year-to-date return of the MSCI Ex- USA market versus the S&P 500.

As you can see, so far this year the overseas markets have returned twice the return of the U.S. market.

This may or may not continue, but the period in which the U.S. markets have outperformed foreign markets has been exceptionally long compared to historical returns, so we might be in for a period of sustained outperformance by these less expensive foreign markets.

Not every great company is domiciled in the U.S. Many of the big pharmaceutical companies, such as Novo Nordisk, Roche, Novartis etc. along with companies like Louis Vuitton, Samsung, Nestle and Toyota etc. are companies that you would not own if you owned only companies domiciled here.

Our goal for you to have as “all-weather” a portfolio as we can provide. Which means that some parts of your portfolio will always be doing better or worse than other parts, which in the short term can be frustrating.

As the great investor Peter Bernstein said-“If you like how everything in your portfolio is acting, then you are not diversified.”

“Home country bias” and “recency” are all traits that can lead investors astray. The majority of Japanese invest in the Japan stock market, Australians in the Australian stock market etc. Home country bias can prevent investors from the benefit of owning good companies not in their home country. Recency can lead investors to assume what has happened recently will always continue. All these natural instincts can lead investors to make less than optimal investment decisions.

Having a disciplined approach to diversification, not one based on current headlines or the emotions of the day, is our best defense and offense to help you reach your goals. And that is our job.

Thank you as always for the trust and confidence you have placed in us. Please don’t hesitate to get in touch with us with any thoughts, concerns, or anything new in your life that we need to know.

Thanks,

Beach

Disclosure: The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of John Foster and not necessarily those of Raymond James. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. Prior to making an investment decision, please consult with your financial advisor about your individual situation.

The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The MSCI ACWI ex USA Index captures large and mid-cap representation across 22 of 23 Developed Markets (DM) countries (excluding the US) and 24 Emerging Markets (EM) countries*. With 2,057 constituents, the index covers approximately 85% of the global equity opportunity set outside the US.

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