Phil M from Boston, MA asks: Mitch, I noticed last quarter that Emerging Markets and countries outside the U.S. performed much better than U.S. stocks. Is this the start of a new trend, or just an anomaly?
Thank you for your question, Phil. Your question shows that you follow the equities markets closely, because you’re absolutely right – foreign outperformed domestic (U.S.) in most categories last quarter, and Emerging Markets are notably having a solid year.
Though there is no black and white explanation for why foreign outperformed, you could point to a few factors that may have helped such as Brexit fears fading, more accommodative monetary policies from the European Central Bank, and better-than-expected economic data from China. You might say it was a fading of negatives that boosted foreign stocks, versus an emergence of new positives.
Here’s a by the numbers look at equities markets last quarter:
It’s clear to see the outperformance, but your question is: will it last? A cyclical argument would say that there’s a good shot it will, if you take a look at the longer term. History tells us that leadership changes hands over time – the U.S. may outperform for a period, but then in the next cycle it could lag. That’s what we’ve seen over the last two cycles. Foreign and Emerging Markets outperformed the U.S. during the 2002 – 2007 bull market, but then opposite has been true in this bull market. It’s a valid argument to forecast that foreign will outperform again.
I’m just not convinced that foreign will regain leadership for the balance of this economic expansion. High debt loads in Emerging Markets along with the commodities resetting will affect growth rates there, and negative interest rate policy in Europe and Japan aren’t likely to reaccelerate growth from here. The U.S. is leading the world.
For investors, the approach should be to build a diversified portfolio that has an overweight to the U.S. but some exposure to foreign, depending on your risk tolerance. That way when we see performance from foreign like we did in Q3, you can participate in the gains.
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