For the one-year period ending September 30, the mutual funds we have been using posted attractive absolute returns. The international funds in particular enjoyed nice gains after treading water for the past three years. After a decade of US dominance, could this be the start of a rotation that once again favors international companies?
In their recent update call, International Value Advisors pointed out that the current US bull market that began in 2009 is now the second most powerful since World War II. Correspondingly, the market value of US stocks as a multiple of GDP is at a higher point now than it was in 2000. Without overemphasizing one particular valuation metric, it is interesting to observe how US stocks performed in the ten years following the 2000 market-cap to GDP peak:
Lest we give the impression that we are ringing the bell to get out of the stock market, it must be acknowledged that the S&P 500 has beaten T-Bills in about 85% of the rolling 10-year time periods dating back to 1935. Owning equity in companies has been a fabulous way to compound wealth, and we believe that the odds still favor stocks over cash when the time horizon is measured in decades.
So how does one balance the notion that stocks are currently expensive with the fact that stocks have usually beaten cash over long time periods? We think (as we have for a while now) that some middle ground is appropriate. “Stocks for the Long Run” is still valid, but only when the stocks are selected judiciously in this era of lofty prices. We let experienced mutual fund managers wait for the bargains and hold cash in the meantime. No one knows if the next decade will be like 2000-2009; our aim is to be prepared either way.
Aaron Pettersen, CFA, CFP®