Having just come through a holiday to celebrate America, it’s time to reflect on the country’s stock market, and celebrate it.
While nervous investors can find plenty of things wrong with the U.S. stock market and the economy — and can point to the Fed, the November elections, fallout from world events, and more as reasons why a crash is coming — the truth remains that the U.S. is still the best market in the world.
That’s not saying you should jump into the market hastily or ignore diversification. It is saying that any effort to “make America great again” doesn’t need to be focused on the stock market because in that department, at least, the U.S. hasn’t been anything but great for a long time.
The negatives about the U.S. market are clear: Real growth in the U.S. gross domestic product is less than 3%, and that’s been so for a decade. The federal budget deficit — which has been narrowing — is actually set to rise again this year, while interest rates — which desperately need to rise to give the Fed tools to calm market nerves — don’t seem to be going anywhere.
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Moreover, no one is excited for the upcoming second-quarter corporate earnings reporting season — the kindest adjective I have seen used by experts is “uneven” but most have been far worse — and while the long-term trends have been reasonable (like the S&P 500 SPX, -0.68% gaining about 3.75% over the first six months of the year), heightened volatility can make long-term investors nutty.
You can find plenty of forecasts suggesting that non-U.S. stocks will outperform domestics, even though that has not been true so far this year, and those same predictions were made last December. With the market having recovered from the financial crisis of 2008 and having been on a strong, long-term uptrend, there is a lot of sentiment that time has run out, and that a bursting of the bond bubble, a change in leadership in the White House, sustained rate hikes (when they eventually happen), or unforeseen fallout from the Brexit vote could be a trigger.
And despite all this, where would you rather invest the equity portion of your portfolio than in U.S. stocks? While there may be greater profit potential in emerging markets and more current opportunities hunting bargains in Europe, the U.S. market offers greater comfort on an emotional level.
Nowadays you can buy index-based exchange-traded funds for virtually every market in the world, allowing you to tilt a portfolio to China, Russia, Bulgaria, Canada, Mexico, or whatever nation or region you favor. Yet while some advisers strategically move client portfolios based on current events and opportunities they see, they’re not giving up the red, white and blue core of a portfolio.
Investors seeking true diversification will want to invest in non-U.S. markets, but investors who get queasy about seeking out positions around the world can get diversification through the shares of multinational U.S.-listed companies.
At a combination graduation/holiday party this weekend, I met a grandfather who was looking to open a Roth IRA for his grandson, the celebrant, who had worked a job while in school but who wasn’t saving for years ahead on his own.
His question was whether to buy a domestic index fund, an actively managed stock fund, some individual stock names, or to go international or perhaps take a chance on China or other markets.
A few guys hearing the conversation weighed in, and ultimately we had three generations represented: the retired grandpa; a couple of parents, and the new graduates.
The older gentleman’s question was answered with a question: “Where in the world do you want to invest the bulk of your money for the rest of your life? The grandfather said that for the two-or-so decades he hopes to have, he figured it should be the U.S.
The father said the exact same thing about his remaining working career and his golden years.
And the son said that while he wants exposure to the world markets, he believes the best place to get that is from U.S.-based multinationals.
Three generations, one answer. God bless the U.S.A. This country’s market is not the perfect solution, and there will be plenty of times when it feels uncomfortable — or worse. But to generate solid stock-market returns over a long stretch of time, there’s no place like home.
By: Chuck Jaffe (Market Watch) .
Photo: The Stock Book.
Review: Emerging Market Formulations &
Research Unit, FLAGSHIP RECORDS.
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