The U.S. stock market has been one of the best performing stock markets since the end of the Financial Crisis. From the end of February 2009 to the end of June, the 3,000 largest stocks in the U.S., as measured by the iShares Russell 3000 ETF, has generated a 17.8 percent annualized return. Over this same time period non-U.S. stocks, as measured by the iShares MSCI All Country World Index ex-U.S. ETF, has returned 9.7 percent annualized. We cite three reasons for the U.S. stock market’s outperformance. First, the U.S. economy has performed better than the rest of the world. Second, the dollar has greatly appreciated against non-U.S. currencies. Third, the valuation of the U.S. stock market has expanded more than that of non-U.S. markets.
Many times investors will extrapolate recent performance trends into the future—expecting the U.S. stock market to continue to outperform non-U.S. stocks. As result, they may ask themselves, “Why bother owning non-U.S. stocks?” We caution against this type of thinking. Historically stock market performance has been mean reverting. In other words, when one area of the world dramatically outperforms (like the U.S. has recently), its valuation gets stretched to the point where it will start to underperform.
The chart and table on page one illustrate this point. Since 1977 there have been eight cycles where the annual performance differential between the U.S. and non-U.S. stock markets has been at least seven percent. Most of the performance variation can be attributed to the change in relative valuations between the U.S. and non-U.S. stock markets. The red dashed lines illustrate this fact. U.S. stocks currently sell at about a 30 percent premium to non-U.S. stocks—near an all-time high. As a result, we think it is highly likely over the next five to 10 years non-U.S. stocks will outperform U.S. stocks and investors should embrace non-U.S. stocks.
The above post has been excerpted from a recent letter of Granite Value Capital.
This newsletter contains general information that is not suitable for everyone. The information contained herein should not be construed as personalized investment advice. Past performance is no guarantee of future results. There is no guarantee that the views and opinions expressed in this newsletter will come to pass. Investing in the stock market involves the potential for gains and the risk of losses and may not be suitable for all investors. Information presented herein is subject to change without notice and should not be considered as a solicitation to buy or sell any security. Any information prepared by any unaffiliated third party, whether linked to this newsletter or incorporated herein, is included for informational purposes only, and no representation is made as to the accuracy, timeliness, suitability, completeness, or relevance of that information. Granite Value Capital, LLC is an SEC registered investment adviser with its principal place of business in Hanover, NH. Granite Value Capital and its representatives are in compliance with the current notice filing requirements imposed upon registered investment advisers by those states in which Granite Value Capital maintains clients. Granite Value Capital may only transact business in those states in which it is notice filed, or qualifies for an exemption or exclusion from notice filing requirements. This newsletter is limited to the dissemination of general information pertaining to its investment advisory services. Any subsequent, direct communication by Granite Value Capital with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. For information pertaining to the registration status of Granite Value Capital, please contact Granite Value Capital or refer to the Investment Adviser Public Disclosure web site (www.adviserinfo.sec.gov).