Americans are feeling pretty good about themselves at the moment. The U.S. hockey team upset the Canadian puck-handlers in Vancouver. That wasn’t supposed to happen. And an out-of-shape Bode Miller won a gold medal in the “super-combined” men’s downhill. That wasn’t supposed to happen either.
Of course, lots of things weren’t supposed to happen for the U.S. in 2010. Consider U.S. stock markets, where investor dollars have been leaving for the sunnier shores of emerging market equities. Instead of U.S. stocks being the dogs of the stock world, however, the Dow Jones Diamond Trust (DIA) has been stronger (+0.03%) than the competition. Notably, Vanguard All World ex- U.S. (VEU) is down -4.0%, while Vanguard Emerging Markets (VWO) is off -4.1% year-to-date.
Then there’s the U.S. dollar. How many folks were talking about U.S. dollar strength for the New Year? I didn’t read a great many forecasts that had the U.S. dollar via PowerShares Dollar Bullish (UUP) being 3% higher through the 4th week of February, let alone 7.7% higher than its November lows.
Sure it’s early. Sure it has a great deal to do with a Greco-Roman thorn in the euro’s side. Nevertheless, relatively speaking, U.S. stocks and the U.S. dollar have out-flanked many of the investment alternatives.
Unfortunately, one should not expect the dynamic to last. The CBO explained that 80% of the outlays from the American Recovery and Reinvestment Act went to Medicaid, unemployment compensation, Social Security, student aid and state/local government grants. That means, in spite of one’s political affections, the stimulus package had no tangible effect on the creation of jobs, only a tangible effect on the budget deficit.
There will come a time in 2010 when California will begin to look like Greece to foreign investors, and the U.S. dollar will hurt because of it. Similarly, the budget deficit will bother potential debt purchasers, and that too will hamper the U.S. dollar.
Yes, Americans should feel good about their standings this Olympics. Yet American investors would be wise to continue to diversify their stock holdings abroad… in China, India, Brazil… especially when the prices get knocked down.
Consider the following: Each time that U.S. stocks ”corrected” since the start of the current cyclical bull market (e.g., Feb-March 09, June-July 09, Oct 09, Jan-Feb 10), stock assets around the world were pulling back even more severely. Yet each time that the cyclical bull resumed, stock assets outside the U.S. rose more dramatically.
If you still find it difficult to commit to the more volatile emerging market ETFs, hedge your U.S.-centric thinking with an all-world fund. There’s iShares All World (ACWI) as well as Vanguard Total World (VT).
Disclosure Statement: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. The company and/or its clients may hold positions in the ETFs, mutual funds and/or index funds mentioned above. The company does not receive compensation from any of the fund providers covered in this feature. Moreover, the commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities.