“What a Wonderful World…”
A month has passed since the surprise election of Donald Trump, another event wrongfully predicted by the punditry. During this time, the CNBC “experts” who wrongfully called for a breakdown in the market are now calling for a market “melt-up.” Nothing like price to change sentiment.
Let’s take a closer look at what has occurred in the market and see if there are other opportunities. Yes, the U.S. stock market has reacted favorably to the election. We have seen financials rally 16% in the last month. The Russell 2000 Value index has also risen by 16%. Nevertheless, a globally diversified portfolio is actually down by 1% since the election, primarily the result of a large bond sell-off (something we have discussed on these pages many times) and an international stock sell-off, mostly concentrated in emerging markets.
This recent dominant performance of U.S. stocks is a continuation of a theme that has persisted over the past few years. Take a look at this chart posted in the Wall Street Journal on December 5th.
As the chart indicates, the U.S. share of global stock market capitalization has risen from 38% to 40% of the total.
Over the past ten years, U.S stocks have returned 6.7% a year versus international at 0.6% a year and emerging markets at 1.3%. Investors are again questioning the benefits of global diversification after an extended period of underperformance by international and emerging market stocks.
Yet, economic and political forces indicate that international may be ready to snap back. The below chart is the Citi Economic Surprise Indexes, which attempt to exhibit how well the economic data is coming in relative to expectations, for the U.S., U.K., the Euro area, Japan, China and the emerging markets. For the first time in months, all of the indexes are above zero, indicating that data around the world for the last month has been better than economists have forecasted.
As you are know, there is no magic timeline for the international and emerging markets to outperform. The problem is investors continue to make the mistake of visiting the church of what works lately. The market has already priced in a lot of the bad news for Europe and Asia. Now is the time to keep your clients diversified and disciplined. We would advise against losing the global diversification faith.
Finally, this week, let us all remember those who gave their lives on December 7, 1941 at Pearl Harbor. We are forever grateful to all those who have served.
Stephen E. Johnson, JD, CFP, Portfolio Manager
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