Has the Performance Reversal Begun?

When the S&P 500 bottomed in March of 2009, ominously, at 666, it may have seemed scary to buy stocks. But, in real time, it was obvious it was a great time to buy them. Incredible businesses were on sale; there were forced sellers a plenty; and the United States government, from the Federal Reserve to Treasury, was willing to do whatever it takes to save the economy and to backstop the financial system. From this market bottom through the end of 2024, investing was an incredibly simple game. Americans who bought stocks at the lows and held on returned 15% a year, experiencing the best 15-year run in American stock market history. As the chart below shows, the USA truly stead out from the rest of the pack. Further, foreigners who bought American stocks did even better as the US Dollar strengthened. Consider the Brits. British citizens who bought American stocks received an even juicier 20% a year as the British Pound rolled down from a high of 2.0 GB to 1.30 today.

It is historically normal for the US stock market to go through periods of outperformance. It is anomalous for the outperformance to last so long. Typically, Europe and Asia also get a turn of outperformance. As illustrated below, the USA and the MSCI EAFE (Europe and Asia) take turns in terms in terms of relative performance every 5 years or so. This 14-year run of outperformance is unprecedented. But, if you were a British citizen growing your money at 20% a year, or you could earn 5% a year locally, what would you choose? It’s no wonder so many Americans, and likely foreign investors as well, are overexposed to American stocks, and unexposed to the rest of the world.

Of course, eventually, high prices solve the problem of high prices and low enough prices create opportunity. There has to be some point where valuations become so compelling in Europe and Asia and so shockingly high in the USA that the trends start to reverse.

Recent evidence suggests the pivot may have already begun. While above the S&P 500 clearly ran way ahead of the pack, on a 1-year basis the S&P 500 drops to the middle of the pack.

And year-to-date, the S&P is losing money while many markets, from Poland to China, are delivering blockbuster returns.

As of the end of February, the United States had the most expensive stocks in the world, as measured by the country’s cyclically adjusted P/E ratio less it’s historical average.

China’s, conversely, were the cheapest in the world. Year-to-date through March 17th, China’s stock market returned 25% while the S&P 500 returned -3%.

Of course, China has a different risk and return profile than the United States. The existential risk of the United States, despite current worries, is most likely zero. In China it is some unknown number above zero. Nevertheless, President of China Xi Jinping wants the stock market to rise. While President of the United States Donald Trump has other objectives on his mind: making trade more fair; lowering long-term interest rates; and onshoring some previously offshored manufacturing. Beyond the geopolitical angles, as the graph shows below, the valuations investors are paying to own stocks in each country could not be more different. If you only own US stocks you may be growing frustrated by the volatile ride to nowhere. Is it time to look abroad for a better home for your money?

Source: Siblis Research & MKAM. The Graph shows a country’s current CAPE minus it’s historical average.