Market Victory Is Fleeting
The U.S. stock market has outperformed virtually all other major markets over the last decade—can the trend last? History has shown that market leadership will change, and when it does, it can occur quickly. We feel one of the biggest errors investors can make is to project recent past performance into the future. This is particularly important today given U.S. stocks’ dominant run.
We’ve prepared a chart to illustrate the point. We started by calculating 12-month returns for the S&P 500 ending in each month of the year over the past four decades, and did the same for the MSCI EAFE index (representing foreign stocks), as well as the Bloomberg Barclays U.S. Aggregate Bond index. Subtracting the returns of the MSCI and Bloomberg Barclays indexes from the S&P 500’s provides a simple means of seeing which index outperformed over a given 12-month period: When the line is above 0%, U.S. stocks were outperforming; when it dips into negative territory, foreign stocks or bonds led. The data over 40 years show just how fleeting market leadership can be when you compare one benchmark against another.
You can see wide swings in both lines over fairly short periods of time. From mid-1980 through August 2020, U.S. stocks outperformed foreign stocks by as much as 35% over a one-year stretch (the one ending in May 1983) and lagged by as much as 64% over 12 months (August 1986), with the S&P 500 outgaining the MSCI EAFE by only an average 0.7% a year for the entire period. The chart shows how the two indexes have traded off leadership over both longer and shorter periods of time, with outperformance often tipping in favor of one asset class or the other for several years at a time.
It’s the same story when you compare the stock and bond markets, although the largest periods of outperformance and underperformance for stocks were fairly balanced, with maximum differences in returns of 45.4% in favor of bonds and a 44.3% tilt toward stocks. Notably, these periods occurred just a year apart, in February 2009 (when stocks were near their bottom) and February 2010 (as the long recovery began). Over the 40 years, as might be expected, stocks did hold a more sizeable 3.6% average return advantage over 12-month periods. But getting there was, as you can see, not without volatility.
If long-term trends hold true, and we believe that they will, it’s only a matter of time before U.S. stocks lag bonds or international stocks, or both, for either a short or an extended period of time. Our view is that when that turn comes, the full benefits of a diversified, risk-aware portfolio will become readily apparent.
For informational purposes only; not a recommendation to buy, hold or sell any investment product. Past performance is not an indication of future returns. All investments carry risk of loss and there is no guarantee that investment objectives will be achieved. Speak with a financial adviser before taking specific action. The investment ideas and opinions contained herein should not be viewed as recommendations or personal investment advice or considered an offer to buy or sell specific securities. Data and statistics contained in this report are obtained from what we believe to be reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed.
Our statements and opinions are subject to change without notice and should be considered only as part of a diversified portfolio. You may request a free copy of the firm’s Form ADV Part 2, which describes, among other items, risk factors, strategies, affiliations, services offered and fees charged.
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