While the beginning of July always brings plenty of patriotic talk, as investors it’s important to understand that the stock market is much bigger than just America.
Yes, the U.S. economy is still the biggest in the world. But according to the World Bank, the U.S. economy is less than 25% of global GDP.
And while the New York Stock Exchange and Nasdaq remain the No. 1 and No. 2 stock exchanges by market capitalization of listed companies, it’s important to remember there are plenty of foreign corporations with U.S. listings and plenty of U.S. corporations that book a lot of revenue overseas.
It’s also important to recognize that while the U.S. is indeed a big player in the global economy, it is not a big a driver of overall growth. The World Bank estimated in June that global growth will hit 2.7% this year — but the U.S. economy is growing by 2.1% while China expands at a 6.5% rate and India is tracking 7.2% growth.
All this adds up to the fact that American investors need to have a global perspective as they approach the markets in 2017.
And increasingly, the data seems to indicate that biasing your investments away from the U.S. and toward other nations appears to be a good idea.
The U.S. market hits a wall
Yes, it has been an undeniably great run for U.S. markets since the 2009 market lows. And yes, since Election Day we have enjoyed another big run as major indexes
have set new all-time highs.
But there could be trouble on the horizon. Here are a few reasons why:
The outlook for the Fed is unclear: The markets hate uncertainty, and the latest Federal Reserve minutes have many investors scratching their heads. Inflation isn’t a problem, but interest rates are going up because some at the Fed think it will heat up soon. The Fed isn’t yet selling off the trillions of dollars in government bonds on its balance sheet, but the bank’s officials are clearly divided and some want to start the process now. Then there’s wages, where the central bank also is divided. If investors are looking for clarity from the Fed to provide direction for the market, they certainly aren’t getting it right now.
Read: Selected highlights from the Fed’s minutes
An overreliance on energy earnings: FactSet reports second-quarter earnings will rely heavily on the energy sector’s rebound from lows the prior year. While the SP 500 is projected to see 6.6% earnings growth, the energy sector is plotting 329% earnings growth.
Hiring cools: Job growth in May slowed to just 138,000 positions created vs. expectations of 185,000. And Thursday’s ADP job report shows that job grow disappointed again in June. It’s going to be hard to make the case that America is seeing acceleration into the second half of the year with stats like that.
Volatility returns: After quieting down at the start of the year, the CBOE Volatility Index
has been busy again. Two spikes in April and May were short-lived, but the so-called “fear index” is ramping again in the last week or so as investors get the jitters.
There are indeed bright spots for the U.S. economy and American stocks right now, but it’s hardly a slam-dunk for investors.
Investors seek opportunity overseas
Meanwhile, there is a lot to like in markets outside the U.S. This includes regions seeing better growth, but also areas that had fallen on hard times previously and could be in the middle of a recovery that drives big returns.
Here are some areas to watch:
Europe is on the mend: I made the case for buying Europe in February, thanks to improving economic indicators and more favorable valuations compared with U.S. stocks. Not only are these trends still in place but the political situation in the European Union has settled down and puts the economic partnership at much less risk. Specifically, the success of French President Emmanuel Macron and the disastrous election that erased Theresa May’s majority in the U.K. have hinted at a more moderate outlook for the EU and a less disastrous Brexit path than previously thought. As a result, while the SP 500
is up about 8% year-to-date, the SPDR Euro Stoxx 50 ETF
is up almost twice that.
India is looking up: India is the fourth-fastest growing economy in the world this year, and for good reason. Large-scale banking reforms look to be paying off after some initial hiccups to start the year, and the International Monetary Fund just said growth will accelerate from 7.2% this year to 7.9% next year. Researchers at Harvard University have plotted a longer-term forecast that predicts India will remain one of the fastest-growing economies in the world through 2025. No wonder the PowerShares India Portfolio ETF
is up about 19% this year and the WisdomTree India Earnings Fund ETF
is up 23% on strong investor interest and optimism for the future.
Emerging markets are back: Talk about nationalism and barriers to trade weighed on emerging markets at the end of 2016. However, those stock markets have surged back in 2017. Take the popular iShares MSCI Emerging Markets Index ETF
up 17% so far this year, or more than double the returns of the SP 500. As the developed world struggles to find growth, smaller markets like the Philippines and Ethiopia offer higher risks but much higher growth rates. There are geopolitical problems and plenty of uncertainty, yes, but you can’t argue with the returns.
It’s common for U.S. investors to think that America is the only game in town. And that’s particularly true in 2017, when domestic stocks still seem to be delivering.
But that could change in a hurry — and given the strong growth metrics elsewhere in the world and the big returns international investors are enjoying, it may make sense to look outside the U.S. in the second half of 2017.