Foreign vs Domestic Equity Performance By Sector by Lawrence Hamtil, Fortune Financial Advisor
Since the prior market peak in October of 2007, US equity markets have outperformed the vast majority of foreign equity markets. In fact, while $10,000 invested in the US at the end of October 2007 would be worth more than $16,000 for a total return in excess of 60%, the same amount invested in the MSCI EAFE (the standard benchmark for developed foreign market equities) would still be underwater, despite reinvested dividends*:
Clint Carlson's Carlson Capital Double Black Diamond fund returned 3.34% in August net of fees. Following this performance, the fund is up 8.82% year-to-date net, according to a copy of the firm's August investor update, which ValueWalk has been able to review. On a gross basis, the Double Black Diamond fund added 4.55% in August Read More
To be fair, one could argue (as I have here and here) that the comparison is a bit unfair as the EAFE index is heavily weighted in financials, while the S&P 500 is a kind of momentum strategy masquerading as an index. To address this concern, and to get a more apples-to-apples feel for US equity performance versus the foreign market, I looked at returns by sector. Surprisingly, since October 2007, the US has reigned supreme in every category (my apologies to Ben Carlson for stealing his table color scheme):
Given that the US has dominated the equity markets over a period spanning almost a decade, it’s little surprise that investors may be tempted to throw in the towel on their foreign investments and go all-in with domestic shares. As Charles Schwab’s Jeff Kleintop pointed out this week, home bias is especially prevalent in the United States, where investors have some 75% of their equity holdings in domestic shares:
This, as Jeff points out, is a mistake; while the US market is well-diversified internally, the fact that it is home to the world’s largest companies means that it can be subject to concentration risk the same as any other market. The best example of this might be the tech bubble of the late 1990s, when technology shares constituted almost 30% of the S&P 500.
It is worth noting, too, that US dominance of the major global equity sectors is a recent phenomenon. Going back to the peak of the previous secular bull market (March 2000), global equity sector performance has been far more balanced, despite an almost 100% total return in the S&P 500, versus less than a 50% return in the MSCI EAFE:
Furthermore, it is worth noting that while the US may have come out ahead in the very long run, it has not been immune from long periods of underperformance. Rather than showing the S&P 500 versus the EAFE, I took sector-equal weight portfolios for both the US and foreign equities (using the components listed in the tables above) and rebalanced them annually. One can see from the graphic that while the cycle currently favors the US, there is no telling why or when the cycle will turn, and the US will lag behind as it did from late 2003 through 2010:
All data courtesy of Morningstar. For definitions of index names and descriptions of data shown, see here.
Now, here are some other links that may interest you:
How Volatility Can Work In Your Favor – Ben Carlson
ETFs May Actually Make Weak Players Weaker – EconomPic
The Five Laws of Gold – Dan Sotiroff
What Are Interest Rates Forecasting for Stocks? – Isaac Presley
How Do Stocks Perform in Presidential Election Years? – Andrew Comstock
Disclosure: Past performance is no guarantee of future results. Both the author and clients of Fortune Financial hold positions in some of the securities mentioned.
This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Fortune Financial Advisors, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Fortune Financial Advisors, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.
The information provided above is obtained from publicly available sources and it is believed to be reliable. However, no representation or warranty is made as to its accuracy or completeness.
About the author
Lawrence Hamtil is a fourteen-year veteran of the financial services industry, having served clients in all aspects of the business during his career, which started in 2002. In 2005, he joined Dennis Wallace of Fortune Financial Services, LLC, becoming, at the time, one of Multi-Financial Securities, Inc’s youngest registered representatives. In 2008, Dennis and Lawrence made the decision to become fully independent by founding their own Registered Investment Advisory (RIA), Fortune Financial Advisors, LLC. He serves clients in the United States and Europe. His financial commentary has been referenced in Barron’s online edition.
You can connect with Lawrence on Twitter ( @lhamtil) or via email, [email protected]