Is it possible to be unhappy if you’ve owned stocks during the last three years when the S&P 500 is up 39.4% for the three year period ending March 31, 2016? That equates to a roughly 11.7% annualized rate of return, which is a satisfactory result by almost any measure. Unfortunately, even with these strong returns, I think that a lot of investors are unhappy with their overall performance right now, and it’s largely because we, as Americans, have a local bias.
There is an old saying that all weather is local, and that phrase strikes me as highly applicable to the investment world. Most of us only hear about the Dow Jones Industrial Average’s closing price on the nightly news which is merely a collection of 30 large cap companies.
The reality is that few, if any, investors today are only invested in U.S. stocks. And there is the “Gotcha!” when discussing stock market performance today—weakness abroad is hindering growth in American investors’ portfolios.
Most investors and advisors have embraced the value of diversification, a highlight of modern portfolio theory and widely considered to be the only free lunch in investing. Investors that embraced diversification and owned small cap stocks, international stocks and, in particular, emerging market stocks following the bursting of the technology bubble benefitted immensely relative to a U.S.-centric investor. Even a small allocation to emerging market stocks was extraordinarily beneficial to returns in the mid-2000s, when emerging markets, as measured by the MSCI Emerging Markets Index, rose nearly 400% in five short years. Fast forward to today, though, and it’s been difficult to keep pace with the U.S. indices.
The Dominance of American Stocks
There are 46 countries and 2,456 companies represented in the MSCI All-Country World Index (ACWI). 23 of the countries are classified as developed markets and 23 as emerging markets. If you look at the three-year returns for the 46 countries represented in the ACWI with a relevant investment to track, it might surprise you that only three have outperformed the S&P 500 Index (the U.S.) during that period.
Of those three, none account for more than 0.66% of the Index (i.e., they are all three inconsequential in the big picture). Therefore, it is fair to say the U.S. has had the best performing stock market of any major country during the past three years! The next closest major country during the past three years was France, which returned a pedestrian 4.5% annualized.
What’s more amazing is that 23 of the countries within the MSCI ACWI have actually returned a negative result during the same three-year period! The negative performers include both countries that have had widely publicized economic issues (e.g., Russia, Brazil and Greece), and big, prosperous countries (e.g., Canada, the U.K., Australia and Mexico). This is how we arrive at today’s dichotomy, where the S&P 500 Index is up nicely, and a widely accepted global benchmark like the ACWI is negative.
One of my colleagues is fond of saying that good things happen to cheap stocks. This sentiment can largely be extended to all assets and even inverted to say that which is dear should be feared, and as Nobel-prize winning economist Robert Shiller proved, what’s cheap today may perform well over the next three to five years. With apologies to Miley Cyrus, if you’re a stock owner, the only party happening globally has been in the U.S.A. It might be time for investors to party elsewhere.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All indices are unmanaged and may not be invested into directly. International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.