Since 2009, the U.S. stock market has made investors a lot of money.
Since the end of the global financial crisis, the S&P 500 has returned over 300 percent (including dividends).
But sooner or later, the good times have to end. And it looks like time is running out for this bull market…
Lee Ainslie's Maverick Capital had a difficult third quarter, although many hedge funds did. The quarter ended with the S&P 500's worst month since the beginning of the COVID pandemic. Q3 2021 hedge fund letters, conferences and more Maverick fund returns Maverick USA was down 11.6% for the third quarter, bringing its year-to-date return to Read More
The outperformance can’t go on forever
The graph below from JP Morgan shows the cycles of outperformance and underperformance of U.S. stocks and the rest of the world, relative to each other. For example, from 1994 to late 2000, the U.S. market outperformed global ex-U.S. by 215 percent. The reverse happened from 2000 to 2008, when global ex-U.S. outperformed by 88 percent. And most recently, since 2009 U.S. stocks have outperformed the rest of the world by nearly 100 percent.
If we look a little deeper… the S&P500 is up 317 percent from its lowest point in March 2009 (in U.S. dollar terms, including dividend reinvestment). That’s compared with 241 percent for MSCI Asia ex Japan, 234 percent for MSCI World, 216 percent for Singapore stocks and 204 percent for Hong Kong’s Hang Seng over the same period, as the graph below shows.
We’ve seen this sort of outperformance before. Take another look at the first graph. As you can see, in the late ‘80s and early ‘90s, U.S. stocks outperformed other global markets by 100 percent. But eventually, U.S. stocks came back to earth… and over the following years, global (ex-U.S.) stocks outperformed U.S. stocks by 39 percent.
The same thing happened again in the late ‘90s… U.S stocks outperformed by 215 percent, but then global (ex-U.S.) stocks ended up outperforming U.S. stocks by 88 percent in the following years.
It’s like a rubber band… stretch it and when you let go it returns to its original shape. So after a period of rising prices, securities tend to deliver average or poor returns. Likewise, market prices that decline too far, too fast, tend to rebound. That is mean reversion, and it works over short and long periods.
And mean reversion isn’t the only reason we think the U.S. bull market is winding down…
Right now, by many measures U.S. stock market valuations are high.
One of the best ways of measuring market value is to use the cyclically-adjusted price to earnings (CAPE) ratio. It’s a longer-term inflation-adjusted measure that smooths out short-term volatilities to give a more comprehensive measure of market value.
As the chart below shows, the CAPE is now at 31.4 times earnings. That’s higher than any time in history, except for the late ‘90s dotcom bubble, and the stock market bubble of the late 1920’s.
High valuations don’t mean that share prices will fall. High valuation levels can always go higher, at least for a bit. Or they could stand still for a while. But mean reversion suggests that at some point, valuations will fall, one way or the other. (Unless “this time is different”. But… it isn’t.)
So what should you do?
For starters, look through your portfolio and cut out some positions that aren’t giving you much upside but still leave you exposed to a correction in stocks.
Next, look to diversify your portfolio a little. And you should set a stop-loss that will trigger your decision to sell. If the stock falls, a stop-loss will limit your losses. And if what you buy goes up in value, a stop-loss will ensure that you keep most of your gains.
Regular readers will know that we’re big fans of diversification. We’ve written before about the importance of not just investing in different sectors and asset classes… but in different markets and countries too. That’s because spreading a portfolio around the world reduces risk… gains in one market can offset losses in another.
And while the gains in U.S. stocks are nearing an end, they’re just getting started in markets like India, Bangladesh and Vietnam… these are three of the fastest-growing markets in the world.
So do yourself a favour and consider moving some of your money elsewhere.
Publisher, Stansberry Churchouse Research