A year ago we shared a Wall Street Journal article with our clients and friends because we found it persuasive on the subject of global stock market valuations. That article, The Case for More Overseas Stock Exposure—And Where, documented the high prices of US equities, and the lower prices of all other world equity markets.
The high relative price of US stocks had by mid-2016 driven us to own the highest allocation to foreign stocks we’ve ever held in our target portfolios. What has happened in the year since we shared that perspective?
Overall, US and foreign stocks have earned similar returns, concealing two different shorter-term trends:
• From May 2016 until the presidential election in November, US shares performed slightly better than foreign shares. After Trump’s election, contrary to expectations, US equities moved sharply higher.
• By March 1, 2017 US stocks had opened a performance gap of more than 10% over foreign stocks. Our decision to overweight foreign was reducing portfolio returns.
Since early March, we’ve seen a significant reversal, with foreign stocks up almost 9% and US stocks flat. We believe that two factors have driven this change. First, center-left candidate Emmanuel Macron won the French election over right-wing anti-European candidate Marine Le Pen, restoring confidence in European markets. Second, the aftermath of Trump’s firing of FBI Director James Comey has shaken confidence in US markets.
This sequence, and the recent superior performance of foreign equities, should remind us of these important investment principles:
Anticipated outcomes, whether positive or negative, are typically priced-in. If the expected good or bad news actually happens, markets will usually react less meaningfully than investors expect. On the other hand, a surprise is likely to send prices in a direction that opposes investor expectations.
The point at which the economic trends appear most obvious is typically the point of greatest risk and opportunity. Earlier this year, the strong consensus was that Trump’s policies would trigger stronger US growth and higher stock prices, while Europe was heading toward dissolution driven by right-wing anti-globalist populism. The expectation was that the dollar would continue to strengthen and US stocks would out-perform. The opposite has happened.
Chasing recent performance is a fool’s game, since asset class performance trends will almost always reverse themselves. On the other hand, when price relationships are out of whack, buying high-quality assets at lower prices may confer real advantage.
Over the last several years, we’ve put three significant investment strategies into place: overweighting value stocks, foreign stocks, and cash. Last year our value tilt was well-rewarded. This year our foreign tilt has delivered higher returns. As long as markets move higher, cash will remain a drag. But when the current bull market comes to an end, our overweight cash position should benefit us in two ways—by reducing downside volatility and by giving us optionality when we see better values.
If you have questions about your asset allocation or your financial plan, TGS advisors are ready to hear from you.
By James S. Hemphill, CFP®, CIMA®, CPWA®/ Managing Director & Chief Investment Strategist
Jim has been a CERTIFIED FINANCIAL PLANNER™ professional since 1982. Jim specializes in complex wealth transfer and retirement transition strategies and coordinates TGS Financial’s investment research initiatives.
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by TGS Financial Advisors), or any non-investment related content, made reference to directly or indirectly in this article will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this article serves as the receipt of, or as a substitute for, personalized investment advice from TGS Financial Advisors. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. TGS Financial Advisors is neither a law firm nor a certified public accounting firm and no portion of this article’s content should be construed as legal or accounting advice. A copy of the TGS Financial Advisors’ current written disclosure statement discussing our advisory services and fees is available upon request.