If we see higher risk assets further over-valued, do not chase the move, but rather sell into price ...
04/19/2007 12:00 am EST
April 19, 2007
Over the last few years international markets have trumped the performance of the USA. That's why in 2006 Americans put 90% of new stock mutual-fund investments into international funds.
In the five years ending September 30, 2006 the MSCI EAFE index, the benchmark for international stock performance, nearly doubled while the Standard & Poor's 500 large-company index rose only 40% and the broader Dow Jones Wilshire 5000 Composite advanced 51%.
Even worse, since 2002, the US has ranked no higher than 19th in performance of the world's major stock markets. In the five years before that, it did no worse than 12th, and cracked the top ten three times.
So, what's going on?
The reasons the pundits usually give boil down to the fact that the US is a mature economy and hence doesn't grow as fast as many emerging countries. Some also say that excessive litigation and regulation, especially the Sarbanes-Oxley Act, are making the US less competitive.
There's some truth to both points, though the US economy has averaged about 3% annual growth for the last 50 years. And as I argued last week here, I think the case against Sarbox is a bit overblown.
I believe that one of two things is happening. Either normal sector rotation has put foreign markets on top for now. Or the markets' performance may reflect the changing competitive position of the US in the world-for better in some ways, for worse in others.
Let's talk about market cycles first. Callan Associates, a San Francisco-based consultant to institutional investors, puts together an ingenious table, which you can find free at www.callan.com/resource.
Called the Periodic Table of Investment Returns, it displays in graphic form how different asset classes have performed over the years. (Financial planners and money managers often distribute copies to clients.) It's modeled after the famed periodic table of the elements, which many of us may vaguely remember from our high-school chemistry classes eons ago.
If you go back long enough-I found older tables dating to 1982-you get a sense that in the investment world what goes around usually comes around.
For example, the MSCI EAFE index ruled the roost in the mid- to late 1980s at the very time the Reagan Revolution was making the US economy more competitive: MSCI EAFE was the top-performing asset class from 1985 to 87 and ranked second in 1988.
It then tumbled to the very bottom of the heap and stayed there for four years in a row, before surging to the top again in 1993 and 1994.
That's about when the long ascendancy of big US blue chips began. The S&P 500 and its growth component, the S&P/Citigroup 500 Growth index, shot the lights out from 1995 to 1998, ranking second and first, respectively, for four straight years.
And EAFE? It was the worst or second worst performer for three consecutive years during that time.
Starting in 2000, the Russell 2000 (especially its value component) took the baton as small-capitalization US stocks moved into a typical seven-year cycle of outperformance. International stocks won the gold medal last year and the year before.
Meanwhile, the once high-flying S&P/Citigroup 500 Growth index has been the second worst-performing asset group for an amazing seven years in a row.
Every dog has its day, of course, and as I've argued here before, the blue-chip growth hound may be ready to bark again.
There's another possibility, of course-that US markets' relatively poor performance reflects a "secular," or long-term, decline of the US's competitive position in the world. Let's examine that.
First of all, the US dollar is down nearly 40% against the euro from its peak in 2000. And as columnist John Authers writes in Thursday's FT ("The Short View: Dollar Weakness," subscription required), "it makes the rest of the world look like a bonanza for Americans while the US looks terrible for European investors."
When the dollar is weak, foreign investments return more in cheap dollars, boosting Americans' returns while shortchanging Europeans. No wonder so many Americans are investing overseas while the Euros are keeping their powder dry on US stocks.
Also, although older European economies are growing more slowly than the US, their big corporations are just now going through the restructuring many US companies did years ago. That's making them more competitive and giving a shot in the arm to their earnings and share prices-and the MSCI EAFE index.
And of course, globalization has brought growth and prosperity to new economic powers like China, India, Eastern European countries, Mexico, and Brazil. That has opened up many new opportunities for global investors that simply didn't exist before.
It also is the result of our successful efforts to spread democratic and free-market ideas around the world. If we're sincere about that, we have to accept that sometimes other countries will beat us at our own game-and we'll just have to try to do better.
Somebody once said to me, "If you believe in the country, you believe in the market." Despite everything that's happened, the US economy has been a great growth engine for six decades and our stock market has given investors healthy returns for generations.
As I've written here before, I believe the market cycle will turn and large US stocks will come back to the forefront again-for reasons we can't yet discern. In the meantime, to paraphrase President Reagan, investors should continue to "trust, but diversify."
Comments? Please E-mail us at TopProsTopPicks@MoneyShow.com.
Howard R. Gold is editor-in-chief of MoneyShow.com. The opinions in this commentary are his own and do not reflect the views of InterShow.
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