You don't have to look outside U.S. stocks for international exposure 🌎
You don't have to look outside U.S. stocks for international exposure 🌎
Plus a charted review of the macro crosscurrents 🔀
Stocks fell last week with the S&P 500 shedding 3% to close at 4,967.23. The index is now up 4.1% year to date and up 38.9% from its October 12, 2022 closing low of 3,577.03. For more on market volatility, read: Even strong stock market years can get very stressful 😱 and It's as if the stock market knows exactly when to mock us 🥴
Financial advisors will often recommend clients to allocate outside of the U.S. by investing in non-U.S. stock markets. This can potentially help investors better diversify their portfolios, and in some cases, provide exposure to markets that could outperform the U.S.
But just because you only invest in U.S. stocks doesn’t mean you’re not exposed to overseas economies.
The U.S. stock market includes many multinational corporations that conduct a lot of business abroad. According to FactSet, 41% of revenue generated by S&P 500 companies comes from international markets.
Sure, we’re only talking about the S&P 500 here. But the combined market cap of these companies represents a little over 80% of the market cap of all publicly traded U.S. stocks.
It’s worth noting that’s it’s not just U.S. companies that do business outside of their home countries. As this chart from JPMorgan shows, companies listed abroad similarly do lots of business outside of their own regions.
Of course, many large non-U.S. companies sell a lots of goods and services to U.S. customers, which means investing in non-U.S. stocks can be a way to indirectly get some exposure to the U.S. economy.
None of this is to say there aren’t great opportunities for investors in non-U.S. stock markets from time to time. The chart below from UBS is a good illustration of this. It shows how the share of the world stock market’s value shifts across regions over time. During the periods when the U.S. (in red) was expanding, it was growing as a share of the world market, which implies that its market was outperforming the rest of the world. When the U.S. was contracting, it was underperforming the rest of the world, which means investors could’ve benefited from having greater exposure to non-U.S. markets during these periods.
There’s much more to be said about investing in companies based outside of the U.S. But for the purposes of this discussion, the bottom line is that you’re already getting lots of exposure to international companies by investing in the U.S.-based stocks of the S&P 500.
The U.S. stock market is exceptional 🇺🇸
It can’t be reiterated enough that the U.S. stock market is absolutely massive. According to UBS, the U.S. market represents about 60% of the value of the entire world stock market.
There’s clearly something special going on right now in the U.S. that helps explain why its stock market has performed so well on the global stage. Maybe it’s the culture of innovation. Maybe it’s the business-friendly regulation. Maybe it’s the relatively strong corporate governance practices. Maybe it’s how shareholders incentivize company executives and employees.
Whatever it is, it’s helping to drive earnings higher. As a result, investing in the U.S. stock market has been a winning trade for a long time, and there’s little reason to believe it won’t continue to be in the years to come.
Zooming out 🔭
Whether it’s loading up on certain stocks, shifting weights towards certain sectors, or increasing exposures to certain overseas stock markets, there seems to be no shortage of ways to tweak your portfolio in ways that may or may not increase your future returns.
But just because you have most of your equity allocation sitting in the U.S. stocks of the S&P 500 doesn’t mean you aren’t already broadly diversified across businesses and industries across the world.
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Related from TKer:
4 key observations about the U.S. stock market to remember 📊
A very long-term chart of U.S. stock prices usually going up 📈
Watch! 📺
I caught up with J.C.Parets and Spencer Israel on StockMarketTV! We discussed evolving market narratives, the outlook for financial media, and more! Check it out on YouTube here! (I come in at the 28 minute mark.)
Reviewing the macro crosscurrents 🔀
There were a few notable data points and macroeconomic developments from last week to consider:
🛍️ People are shopping. Retail sales increased 0.7% in March to a record $709.6 billion.
Categories driving strength included online, gas stations, building materials, grocery, and restaurants and bars. Sporting and hobby, clothes, electronics, and department stores saw declines.
It’s more evidence that the economy has gone from very hot to pretty good.
For more, read: Economic growth: Slowdown, recession, or something else? 🇺🇸 and Unsettling stats about consumer health are missing the bigger picture 💵
💳 Card data suggests spending is holding up. From JPMorgan: “As of 12 Apr 2024, our Chase Consumer Card spending data (unadjusted) was 3.8% above the same day last year. Based on the Chase Consumer Card data through 12 Apr 2024, our estimate of the U.S. Census April control measure of retail sales m/m is 0.19%.“
From Bank of America: “Total card spending per HH was up 2.6% y/y in the week ending Apr 13, according to BAC aggregated credit & debit card data. Retail ex auto spending per HH came in at 0.8% y/y in the week ending Apr 13. Overall, y/y spending growth is likely still boosted by the Easter Sunday timing mismatch.”
For more on what’s bolstering personal consumption activity, read: Unsettling stats about consumer health are missing the bigger picture 💵 and Consumer finances are somewhere between 'strong' and 'normal' 💰
💼 Unemployment claims stay low. Initial claims for unemployment benefits stood at 212,000 during the week ending April 13, unchanged from the week prior. While this is above the September 2022 low of 187,000, it continues to trend at levels historically associated with economic growth.
For more, read: Labor market: How cool will it get? 🥶
⛽️ Gas prices rise. From AAA: “Lackluster domestic demand for gasoline paired with decreasing oil prices led to the national average for a gallon of gas climbing just four cents to $3.67 since last week. With tensions running high over the past three weeks in the Middle East, the cost of oil reached the upper $80s per barrel. However, it has since fallen several dollars into the low $80s as the oil market watches to see if any further military actions occur.”
For more on energy prices, read: The other side of the oil price story 🛢
🏠 Mortgage rates rise. According to Freddie Mac, the average 30-year fixed-rate mortgage rose to 7.1% from 6.88% the week prior. From Freddie Mac: “As rates trend higher, potential homebuyers are deciding whether to buy before rates rise even more or hold off in hopes of decreases later in the year. Last week, purchase applications rose modestly, but it remains unclear how many homebuyers can withstand increasing rates in the future.”
For more on mortgages and home prices, read: Why home prices and rents are creating all sorts of confusion about inflation 😖
🏚 Home sales fall. Sales of previously owned homes fell by 4.3% in March to an annualized rate of 4.19 million units. From NAR chief economist Lawrence Yun: “Though rebounding from cyclical lows, home sales are stuck because interest rates have not made any major moves. … There are nearly six million more jobs now compared to pre-COVID highs, which suggests more aspiring home buyers exist in the market."
💸 Home prices rise. Prices for previously owned homes increased month over month and from year-ago levels. From the NAR: “The median existing-home sales price rose 4.8% from March 2023 to $393,500 – the ninth consecutive month of year-over-year price gains and the highest price ever for the month of March.“
🏠 Homebuilder sentiment recovery pauses. From the NAHB’s Robert Dietz: “April’s flat reading suggests potential for demand growth is there, but buyers are hesitating until they can better gauge where interest rates are headed. … With the markets now adjusting to rates being somewhat higher due to recent inflation readings, we still anticipate the Federal Reserve will announce future rate cuts later this year, and that mortgage rates will moderate in the second half of 2024.”
🔨 New home construction falls. Housing starts fell 14.7% in March to an annualized rate of 1.32 million units, according to the Census Bureau. Building permits fell 4.3% to an annualized rate of 1.46 million units.
For more on housing, read: The U.S. housing market has gone cold 🥶
😬 This is the stuff pros are worried about. According to BofA’s April Global Fund Manager Survey, fund managers identified “higher inflation” as the “biggest tail risk.”
The truth is we’re always worried about something. That’s just the nature of investing.
For more on risks, read: Sorry, but uncertainty will always be high 😰 and Two recent instances when uncertainty seemed low and confidence was high 🌈
🛠️ Industrial activity picks up. Industrial production activity in March rose 0.4% from February levels, with manufacturing output rising 0.5%.
For more on activity stabilizing as inflation cools, read: The bullish 'goldilocks' soft landing scenario that everyone wants 😀
📈 Near-term GDP growth estimates look good. The Atlanta Fed’s GDPNow model sees real GDP growth climbing at a 2.9% rate in Q1.
For more on economic growth, read: Economic growth: Slowdown, recession, or something else? 🇺🇸
Putting it all together 🤔
We continue to get evidence that we are experiencing a bullish “Goldilocks” soft landing scenario where inflation cools to manageable levels without the economy having to sink into recession.
This comes as the Federal Reserve continues to employ very tight monetary policy in its ongoing effort to get inflation under control. While it’s true that the Fed has taken a less hawkish tone in 2023 and 2024 than in 2022, and that most economists agree that the final interest rate hike of the cycle has either already happened, inflation still has to stay cool for a little while before the central bank is comfortable with price stability.
So we should expect the central bank to keep monetary policy tight, which means we should be prepared for relatively tight financial conditions (e.g., higher interest rates, tighter lending standards, and lower stock valuations) to linger. All this means monetary policy will be unfriendly to markets for the time being, and the risk the economy slips into a recession will be relatively elevated.
At the same time, we also know that stocks are discounting mechanisms — meaning that prices will have bottomed before the Fed signals a major dovish turn in monetary policy.
Also, it’s important to remember that while recession risks may be elevated, consumers are coming from a very strong financial position. Unemployed people are getting jobs, and those with jobs are getting raises.
Similarly, business finances are healthy as many corporations locked in low interest rates on their debt in recent years. Even as the threat of higher debt servicing costs looms, elevated profit margins give corporations room to absorb higher costs.
At this point, any downturn is unlikely to turn into economic calamity given that the financial health of consumers and businesses remains very strong.
And as always, long-term investors should remember that recessions and bear markets are just part of the deal when you enter the stock market with the aim of generating long-term returns. While markets have recently had some bumpy years, the long-run outlook for stocks remains positive.
For more on how the macro story is evolving, check out the the previous TKer macro crosscurrents »
TKer’s best insights about the stock market 📈
Here’s a roundup of some of TKer’s most talked-about paid and free newsletters about the stock market. All of the headlines are hyperlinked to the archived pieces.
10 truths about the stock market 📈
The stock market can be an intimidating place: It’s real money on the line, there’s an overwhelming amount of information, and people have lost fortunes in it very quickly. But it’s also a place where thoughtful investors have long accumulated a lot of wealth. The primary difference between those two outlooks is related to misconceptions about the stock market that can lead people to make poor investment decisions.
The makeup of the S&P 500 is constantly changing 🔀
Passive investing is a concept usually associated with buying and holding a fund that tracks an index. And no passive investment strategy has attracted as much attention as buying an S&P 500 index fund. However, the S&P 500 — an index of 500 of the largest U.S. companies — is anything but a static set of 500 stocks.
The key driver of stock prices: Earnings💰
For investors, anything you can ever learn about a company matters only if it also tells you something about earnings. That’s because long-term moves in a stock can ultimately be explained by the underlying company’s earnings, expectations for earnings, and uncertainty about those expectations for earnings. Over time, the relationship between stock prices and earnings have a very tight statistical relationship.
Stomach-churning stock market sell-offs are normal🎢
Investors should always be mentally prepared for some big sell-offs in the stock market. It’s part of the deal when you invest in an asset class that is sensitive to the constant flow of good and bad news. Since 1950, the S&P 500 has seen an average annual max drawdown (i.e., the biggest intra-year sell-off) of 14%.
High and rising interest rates don't spell doom for stocks👍
Generally speaking, rising interest rates are not welcome news for the economy and the stock market. They represent higher financing costs for businesses and consumers. All other things being equal, rising rates represent a hindrance to growth. However, the world is complicated, and this narrative comes with a lot of nuance. One big counterintuitive piece to this narrative is that historically, stocks have actually performed well during periods of rising interest rates.
How stocks performed when the yield curve inverted ⚠️
There’ve been lots of talk about the “yield curve inversion,” with media outlets playing up that this bond market phenomenon may be signaling a recession. Admittedly, yield curve inversions have a pretty good track record of being followed by recessions, and recessions usually come with significant market sell-offs. But experts also caution against concluding that inverted yield curves are bulletproof leading indicators.
How the stock market performed around recessions 📉📈
Every recession in history was different. And the range of stock performance around them varied greatly. There are two things worth noting. First, recessions have always been accompanied by a significant drawdown in stock prices. Second, the stock market bottomed and inflected upward long before recessions ended.
In the stock market, time pays ⏳
Since 1928, the S&P 500 generated a positive total return more than 89% of the time over all five-year periods. Those are pretty good odds. When you extend the timeframe to 20 years, you’ll see that there’s never been a period where the S&P 500 didn’t generate a positive return.
What a strong dollar means for stocks 👑
While a strong dollar may be great news for Americans vacationing abroad and U.S. businesses importing goods from overseas, it’s a headwind for multinational U.S.-based corporations doing business in non-U.S. markets.
Economy ≠ Stock Market 🤷♂️
The stock market sorta reflects the economy. But also, not really. The S&P 500 is more about the manufacture and sale of goods. U.S. GDP is more about providing services.
Stanley Druckenmiller's No. 1 piece of advice for novice investors 🧐
…you don't want to buy them when earnings are great, because what are they doing when their earnings are great? They go out and expand capacity. Three or four years later, there's overcapacity and they're losing money. What about when they're losing money? Well, then they’ve stopped building capacity. So three or four years later, capacity will have shrunk and their profit margins will be way up. So, you always have to sort of imagine the world the way it's going to be in 18 to 24 months as opposed to now. If you buy it now, you're buying into every single fad every single moment. Whereas if you envision the future, you're trying to imagine how that might be reflected differently in security prices.
Peter Lynch made a remarkably prescient market observation in 1994 🎯
Some event will come out of left field, and the market will go down, or the market will go up. Volatility will occur. Markets will continue to have these ups and downs. … Basic corporate profits have grown about 8% a year historically. So, corporate profits double about every nine years. The stock market ought to double about every nine years… The next 500 points, the next 600 points — I don’t know which way they’ll go… They’ll double again in eight or nine years after that. Because profits go up 8% a year, and stocks will follow. That's all there is to it.
Warren Buffett's 'fourth law of motion' 📉
Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac’s talents didn’t extend to investing: He lost a bundle in the South Sea Bubble, explaining later, “I can calculate the movement of the stars, but not the madness of men.” If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases.
Most pros can’t beat the market 🥊
According to S&P Dow Jones Indices (SPDJI), 59.7% of U.S. large-cap equity fund managers underperformed the S&P 500 in 2023. As you stretch the time horizon, the numbers get even more dismal. Over a three-year period, 79.8% underperformed. Over a 10-year period, 87.4% underperformed. And over a 20-year period, 93% underperformed. This 2023 performance follows 13 consecutive years in which the majority of fund managers in this category have lagged the index.
The sobering stats behind 'past performance is no guarantee of future results' 📊
S&P Dow Jones Indices found that funds beat their benchmark in a given year are rarely able to continue outperforming in subsequent years. For example, 318 large-cap equity funds were in the top half of performance in 2020. Of those funds, 39% came in the top half again in 2021, and just 5% were able to extend that streak through 2022. If you set the bar even higher and consider those in the top quartile of performance, just 7% of 156 large-cap funds remained in the top quartile in 2021. No large-cap funds were able to stay in the top quartile for the three consecutive years ending in 2022.
The odds are stacked against stock pickers 🎲
Picking stocks in an attempt to beat market averages is an incredibly challenging and sometimes money-losing effort. In fact, most professional stock pickers aren’t able to do this on a consistent basis. One of the reasons for this is that most stocks don’t deliver above-average returns. According to S&P Dow Jones Indices, only 24% of the stocks in the S&P 500 outperformed the average stock’s return from 2000 to 2022. Over this period, the average return on an S&P 500 stock was 390%, while the median stock rose by just 93%.
