The Long Case for U.S. Equities 14 comments
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Before going any further, I want to make clear this article will be concerning the next 3-5 years; not 3-5 days, or 3-5 months.
I think the time may have come to over-weight U.S. equities. I'm not trying to pick any bottom here, nor am I making this statement solely based upon a contrarian thought, though it obviously has a part.
Let us first examine the performance of U.S. vs. foreign markets.
I've used a 3 year chart to compare emerging markets (EEM), developed markets (ADRD), and the U.S. (SPY); as you can guess, the shaded area represents emerging, green being developed, and blue being the U.S. It easily illustrates the outperformance of international equities, and this goes back further than the chart shows, of course.
Now let's look at this same chart, only year-to-date.
So far this year, the global markets are in the same boat. Overall emerging, developed, and U.S. markets are down around 15%, give or take. I want to take this and focus particularly on Asia- China, India, and South Korea, because I believe their health relies more heavily upon the health of the U.S. economy and consumer (exports).
- China: -23%
- India: -42%
- S. Korea: -20%
- Europe:-13%
- U.S.: -12%
Until recently, hiding out in emerging markets has given investors quite a reward. This proved especially true last year, when our own economy started to crack and show signs of stress; because of the great global growth story, Asia emerging markets with their strong GDP growth became a great place to weather the slowing the U.S. was beginning to show.
My case for overweighting U.S. equities goes something like this:
- the troubles we are currently dealing with domestically are leading to troubles and slowdowns in many global markets
- because the U.S. is helping to cause this, the U.S. economy & consumer will need to rebound before these emergings will be able to; the same goes for Europe and other developed nations with regards to U.S. housing and financial system strength
- while we are probably nowhere near the end, U.S. equities are becoming very fairly priced and even cheap, in some cases
- if some in the media are really "overdoing it" in their display of pessimism toward the U.S. economy, the international/emerging market theme may continue to dominate; if so, this only strengthens the flow into U.S. equities if and/or when those buying into that theme eventually give it up
- and why not throw in the multi-year outperformance displayed by many international markets
I'm not saying emerging markets are dead here, but prices will be re-adjusting to their slowing GDPs (global commodity inflation is of no help, either). As GM goes, so goes the nation? As the nation goes, so goes the world? Maybe. This is just a thought, taking the other side to those who are puking up U.S. equities and our economy.
Of course, all this being said, Japan is only down 5% YTD; Brazil is up 11%; and Canada and Mexico are up 4% and 2%, respectively.
Disclosure: Author is long U.S. and INTL equities. Mentioned specifically in article: long position in SPY.
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This article has 14 comments:
You wouldn't look at a 1 month chart to trend for next month, or a 1 week chart to predict next week. And to use a YTD chart to predict the next 3-5 years is like using a 1 day chart to predict what's going to happen next week or a 1 week chart to predict next quarter.
And finally, just because markets tend to go up in the long haul, there's still a chance that it might not over the next 3-5 years. SPY certainly didn't do so well if you bought back in as the dot com bubble was gradually bursting in 2001-2002 rather than the true bottom in 2003.
Connect all the lows and see where we are and where we need to be.
S & P needs to drop to 750 to be a real long term value.
Anything less than that is going to be just another mini bull market that eventually gives back all its gains.
if you take 15% or so off S&P earnings estimates and slap on a 14 or 15 p/e you'll get a price of around $1100-$1150..which still could be to high.
as far as the charts: didn't really use them to be predictive, more just to illustrate the out-performance of intl vs us, and the similar to under-performance of intl markets this year, given the turmoil in financial system.
wasn't trying to make the case for a great run or rebound, more so though of future out-performance of the us relative to intl, and asia emergings in particular.
chose 3-5 years figuring it will be at least another year, if not longer, to clear out some of the troubles our economy faces...and that us could out-perform above mentioned markets for 2, maybe 3, years following that.
Re-grow is probably more appropriate.
The USA needs to remake itself and retool it's engine. The past two decade's engine of growth, debt, financials/wall street, and lies (CDO/AAA Ratings/DOT COMs) are not coming back. There's got to be a new driver before USA can grow significantly.
Emerging market, on the other hand, doesn't need to change their growth story. Yes, they will (and need to) slow down, but even if they just raise the bar on their BASIC BASIC needs and infrastructure, that's a TON of pent up growth!
That's the main difference between the two.
This is a 60 year cycle between passing of the torch between developed and developing, and we're not even past the first decade!
Recession= p/e 10 (BASED ON FALLING EARNINGS) meaning 10,000 Dow.
What about currency effects? Implicit in being over-weight in US equities is a bet that the USD ain't going much lower. There's an argument to be made for being invested in emerging markets as a currency hedge if nothing else...