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Foreign Markets Could Yield Better Returns Than the U.S. in the Mid Term

Published 19/07/2023, 11:11
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  • U.S. stock market has outperformed other markets in the last 15 years, but this has not always been the case
  • Which is why diversification across geographical areas is critical
  • Some emerging markets offer great opportunities and can beat U.S. stock market returns
  • Let's talk about the importance of diversification in your investment portfolio, especially when it comes to geographical areas.

    You know how crucial it is to have a well-rounded investment portfolio to reduce risks in the financial markets. Diversification not only means investing in different types of assets or markets like stocks and bonds but also spreading your investments across various geographical areas.

    Here's the interesting part: In the United States, many investors tend to focus on their local market rather than exploring opportunities in Europe or emerging markets. There are a few reasons for this. First, they might not be familiar with those markets, and second, there's the currency effect to consider.

    However, the third reason is intriguing. They believe that investing in the U.S. stock market will lead to higher returns. This has been true for the last 15 years, from 2008 to 2023 (end of May). The S&P 500 gained +9.2% during this period, while the iShares MSCI EAFE ETF (NYSE:EFA) returned +2.7%, and the MSCI Emerging Markets index, +1%.

    But if we look back even further, the story changes. For example, from 2000 to 2007, the S&P 500 only had an annual return of +1.7%, whereas the MSCI EAFE achieved +5.6%, and the MSCI Emerging Markets soared at +15.3%.

    Taking it back to 1970 to 2007, the S&P 500 had an average annual return of +11.1%, but interestingly, the MSCI EAFE surpassed it with +11.6%. It's fascinating to see that the U.S. market struggled in the 1970s and 1980s but performed better in the 1990s and after the 2008 global financial crisis.

    This clearly shows why having geographic diversification in your portfolio is essential. Depending on the time period you consider, different stock markets may outperform others. So, diversification across geographical areas helps mitigate risks and capitalize on the opportunities available in different regions.

    S&P 500's 13th Best Start Ever to a Year

    As of now, we've completed the first 132 trading days of this year, and it's worth noting that the S&P 500 has had an impressive start, ranking as the 13th-best start in its history with a remarkable return of +18.6%.

    The top three historical starts for the S&P 500 were in 1933 with a staggering +39.5% return, followed by 1975 with +38.3%, and 1943 with +28.7%.

    What makes this even more interesting is that when we examine the 15 best starts in the S&P 500's history, the trend shows that the market ended the year with an overall positive return in each of those instances.

    The lowest annual return among those top starts occurred in 1987 with +2.3%, and the next lowest was in 1954 with +17.2%. On the other hand, the best-performing years were 1933, with an outstanding +44.1% return, and 1954 with a remarkable +44%.

    No All-Time Highs So Far Though

    The S&P 500 has not reached any all-time highs so far this year.

    If we look back, the last year without any new record highs was in 2012. However, in the years leading up to 2023, there have been several instances of the S&P 500 reaching new all-time highs:

    • 2013: 45 record highs
    • 2014: 53 record highs
    • 2015: 10 record highs
    • 2016: 18 record highs
    • 2017: 62 record highs
    • 2018: 19 record highs
    • 2019: 36 record highs
    • 2020: 33 record highs
    • 2021: 70 record highs
    • 2022: 1 record high

    Over the extended period from 1929 to 2023, there have been a total of 50 years without the S&P 500 reaching a new all-time high. And with the current year still ongoing, it could become 51 years without an all-time high if the trend continues.

    The Real Economy and the S&P 500 Don’t Always Move Together

    About a year ago, U.S. inflation hit a 40-year high at +9.1%. But thanks to the Federal Reserve's aggressive cycle of interest rate hikes, inflation has been on the decline.

    In June 2022, it was +9.1%, then in September, it dropped to +8.2%, and by December, it further decreased to +6.5%. As of March this year, it was at +5%, and in June, it reached +3%.

    Core inflation, which excludes volatile factors, also went down to +4.8%, marking the lowest level since October 2021. This is good news, especially for people's wallets and purchasing power.

    But here's the thing: the economy and the stock market don't always go hand in hand. If we go back to 1930, we can find several years when the U.S. GDP and the S&P 500 didn't move in the same direction.

    You might think that with GDP growth, the S&P 500 goes up, but that's not always the case.

    There were years with GDP growth, but the S&P 500 (total return) fell, like 1934, 1937, 1962, 2000, and 2022. On the other hand, there were years when GDP was down, but the S&P 500 (total return) still rose, such as 1933, 1949, 1982, 2009, and 2020.

    In short, there have been 33 years in which the country's GDP rose or fell, but the S&P 500 (total return) didn't necessarily follow the same path. It shows that the relationship between economic growth and stock market performance isn't always straightforward.

    Bottom Line

    The U.S. stock market has outperformed other major markets in the last 15 years. However, this has not always been the case. It is important to diversify your investments across different geographical areas to reduce your risk and maximize your potential returns.

    Additionally, the stock market is not always a good proxy for the real economy. It is important to consider other factors when making investment decisions, such as the valuation of stocks and the outlook for interest rates.

    ***

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    Disclaimer: This article is written for informational purposes only; it is not intended to encourage the purchase of assets in any way, nor does it constitute a solicitation, offer, recommendation, advice, counseling, or recommendation to invest. We remind you that all assets are considered from different perspectives and are extremely risky, so the investment decision and the associated risk are the investors'.

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