Is it the end of U.S. Market Domination?
The US markets have done well the past 5 years, even including the end of ’08 and the beginning of ’09. Up roughly 50% for the DIA (49%), 52% for the IWM and 47% for the SPY. I’m using the ETFs instead of the Indices because you can’t buy the Dow Jones Industrials, the S&P 500 or the Russell 2000 directly. These US Index based ETFs absolutely swamped the returns of the rest of the developed world and the emerging markets.
The developed world excluding the US and Canada (EFA) was up 18% in the last five years, and EEM, representing the emerging markets, just under that at 14%.
Before we go on, let’s agree that the time for bonds is over. They had a great run, but if you think interest rates are falling from here, or that equities are overpriced compared to money market funds, you are in the wrong blog. What might not be obvious to all is that SPY, even including the end of 2008, has now beaten TLT (20 year US Treasury bond fund) returns when adjusted for dividends and interest.
Now, back to equities…
Over the past 5 years we could have taken all the market, currency, government, inflation and liquidity risk of being in the emerging markets, and got 1/3rd the return of just investing in the good ol’ safe USA! Right! The USA with the stable government, stable inflation, no currency risk, perfect liquidity due to a well-managed set of exchanges and stable regulatory environment…
Ok, well compared to the rest of the world the US is stable.
So, should we be staying in the US? Every one of us has been told that past returns are no guarantee of future results. And in the case of asset classes, that is especially true.
We all know markets that are in favor fall out of favor, and are replaced with what is currently out of favor. We also know the markets do a decent job, given enough time, of pricing in the risks and the potential growth of the various asset classes. Bonds and the US equity markets over the past 5 years were a good place to be.
The time for rotation is upon us. Maybe not today, or this week. But it is time to consider why the US did well, and, just as importantly, why Europe and Japan (which dominate the developed world outside of the US and Canada) didn’t.
We all know about the problems in the PIIGS (Portugal, Ireland, Italy, Greece and Spain). Heck, a couple times we were convinced the massive economy of Portugal was going to bring down the Euro Zone and the world economy. Well, massive if compared to the economy of Utah. It is twice the economic power of Utah, the 33rd state by GDP rank. Wow, it is even almost 2/3rds the size of Michigan, and we know what a great power and growth story Michigan is.
Seriously, European stocks did badly while the Euro was under pressure, the European economy was in recession, and there was wide-spread fear that Portugal, Italy, Ireland, Greece or Spain would fail and cause a domino effect across Europe and potentially the rest of the world.
Now, the Euro is stable, the European Economy is exiting its recession, and the PIIGS aren’t in danger of getting worse off. None of that is great news, but neither is it bad news. If the markets price in disaster, and it is avoided, then the market will remove that risk premium. Sometime. When it feels like it. Because we all know the market is always rational. Eventually.
Seriously, the markets may move in unpredictable ways in the short term, but over time the markets always rotate to reward something different. For the recent 5 year window, the US equities and bonds have been the favored asset class. All we know for sure is that that won’t stay constant.
There are some signs we will talk about in the next few weeks that European equities are recovering. We have already seen the reaction in Japan to new policies. It’s been a great ride to here, time to evaluate where the market should be looking next.