For years, US investors have been told to 'go global' in search of stronger growth and higher returns. And Americans obliged by pouring billions of dollars into international stocks, mutual funds and exchange-traded funds.
But now the case for overseas investing appears to be unraveling.
Since global markets topped out late in 2007, the much-maligned US, the very source of the subprime mortgage meltdown that has racked credit markets worldwide, has dramatically outperformed some of last year's hottest markets.
The blue chip Dow Jones Industrial Average and the large-cap Standard & Poor's 500 both have lost much less than their major European and Asian counterparts of late, suggesting that the five- or six-year run in which foreign bourses routinely thrashed the S&P and the Dow has ended.
"The international [outperformance] was a great story, but it's over," says Alec Young, S&P's international equity strategist, who notes that US stocks now represent 41.3 per cent of world stock market capitalization, up from 40 per cent at the end of the year.
International markets are down 20 per cent across the board in local currencies, Young says, so the weak dollar doesn't even factor in. And over the past few months, S&P has been steadily reducing its recommended exposure to international stocks.
Despite big falls from their October all-time highs, the Dow and the S&P are among the world's best-performing major markets--Brazil, Mexico and Canada--all of which happen to be in the Western Hemisphere.
In fact, despite all the moaning and groaning on Wall Street and in the financial media, those big US indexes have still not crossed the 20 per cent decline that technically signals a bear market. And yet some of last year's biggest winners--Germany, India and especially China--are deep in bear market territory.
Despite a strong currency and a fairly robust economy, the German DAX index is down 21 per cent from its high, in the same range as that of its querulous neighbor, France.
And in Asia, whose century we supposedly inhabit, it's been a bloodbath.
From India, which was just about to dethrone Silicon Valley as the world's low-cost high-tech capital, to China, the world's next economic superpower, to Japan, whose "lost decade" US policymakers are now allegedly powerless to avert, investors have lost not only their shirts but also their shoes, their socks, their belts and their pants.
These markets have racked up declines ranging from 28 per cent in Mumbai to a sickening 38 per cent in Shanghai, through March 19. Meanwhile, those of us who've been backward enough to stay in the "been there, done that" US stock markets have taken relatively modest hits, with returns comparable to those of last year's global superstar, Brazil.
And that comes amid a financial crisis even former Federal Reserve chairman Alan Greenspan dubs "the most wrenching since the end of the Second World War." Housing prices have plummeted, consumer spending and employment have tumbled, oil prices topped $100 a barrel until March 19 and gasoline approaches $4 a gallon.
Either the equity markets are in complete denial, and US markets will soon face a major crash, or maybe, just maybe, great U.S. companies that are not home builders or financials or purveyors of overpriced consumer junk are quietly selling excellent products and services around the world and are still making good money.
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Despite everything, the US economy is a giant with a lot of advantages that may be helping its markets now.
Meanwhile, the bloom is off the rose in China. Hong Kong's Hang Seng index fell 3.5 per cent overnight, and the Shanghai Composite Index has fallen below 4,000 after topping out over 6,000 last October, when we recommended selling Chinese stocks. Inflation is rising, threatening to puncture China's growth bubble amid food and fuel shortages and an energy squeeze.
And as the Beijing Olympics approaches, a rebellion has broken out in Tibet and in neighboring provinces as Tibetans look for some autonomy and religious freedom. China's answer: Crush the dissenters and blame the Dalai Lama for everything.
These events may help crack the finely wrought veneer the government has crafted in its effort to make China shine in the eyes of the world. Ultimately it may remind investors that this is very much a dictatorship whose economy is still firmly controlled by the Communist Party.
So, what lessons can we learn?
First, nothing lasts forever in investing--not tech stocks in the 1990s, housing in the early part of this decade or commodities now. International stocks, especially emerging markets, had a great run, but now, as Young says, may be their time to revert to the mean and lag ours for a while.
Second, despite its many naysayers, the US isn't dead. Over the last couple of years, I've observed a certain schadenfreude -- a joy in other people's trouble -- in the downright glee with which some commentators have viewed the recent fall of the dollar and underperformance of US stocks. But now investors may realize that the US economy is much more resilient than others in times of crisis like this.
Third, every boom and bubble has its own rationale, but you should always put it in perspective. Nine out of $10 from US fund investors went into international equities in 2006, and pundits such as Fidelity's Bruce Johnstone until recently advised investors to put as much as two-thirds of their equity into overseas stocks. I'd say 20 per cent (no more than 5 per cent in emerging markets) looks about right now.
Yet even that's a lot more international exposure than Americans had a decade ago. The truth is, the world is a smaller place and many economies and markets are becoming big new players on the world stage. Emerging markets especially will have much bigger ups and downs, but in the long run they should show bigger growth.
Howard R Gold is executive editor of MoneyShow.com. The opinions expressed here are his own and do not necessarily represent the views of InterShow.
