The Numbers Behind a Home Bias

US vs International Equities

It’s been an up and down week in the markets, following a down week last week. The headlines continue to be driven by inflation news (good and bad), July jobs report last week (somewhere in the middle) and last week’s downgrade of U.S. debt from AAA to AA+ by Fitch (bad but not worrisome). What caught my eye in the last week was a research report I was made aware of by a daily newsletter I subscribe to called DataTrek. I found some of the numbers from the report compelling and I’m sure you’ll find it interesting as well.

Country Bias and Preference for ETFs

In the report titled “Long-term shareholder returns: Evidence from 64,000 global stocks” the authors analyzed stocks around the world from the time period of 1990-2020. I thought some of the data and information was so interesting that I wanted to share it with all of you. Here are a few snapshots from the 30-year period they analyzed:

  • Only 2.4% of stocks were responsible for all the gains in global markets from 1990-2020
  • Of the remaining 97.6% of stocks, their gains only matched the average 1-month Treasury bill rate of return (generally viewed as the “risk-free rate of return”)
  • Almost 58% of stocks didn’t return enough to beat this risk-free rate of return
  • The top 50 global stocks over this time period accounted for 31% of total gains
  • Of the top 50 global stocks, 35 were U.S. companies

Some of my big takeaways from this are as follows:

Picking Stocks is HARD – As you can imagine, when you see stats like this, it makes sense why we predominantly use ETFs in our portfolios. It is very difficult to pick individual stocks to not only outperform the market but to even beat the risk-free rate of return! Because of this, we like to invest in the overall market and add some tactical positions to gain exposure to sectors of the market we feel are primed to perform well.

Home country bias has HELPED our methodology – Many market participants advocate for a large exposure to international markets. They base this on historical fluctuations of U.S. vs. international markets and the thought that there will be a reversion to the mean. I’m a bit skeptical of this. We like to look at the reasons for these swings. Historical returns are a good way to help make predictions, but we’re also aware that history does not always repeat itself. The big changes that have taken place, and why we like the U.S. so much is two-fold. For one, our largest U.S. companies make up approximately 50% of their revenue in overseas markets and we now live in a global economy. Because of this global economy, we tend to favor an environment that rewards innovation. This is exactly what the U.S. markets have provided. When you see 35 of the top 50 global companies are U.S. based, this gives us confidence that we are in the best market in the world. The next highest country was China / Hong Kong which had 5 companies.

Other Items in the News

Inflation – We had some mixed news yesterday with the latest CPI report for July. The numbers came in at, or just below, market expectations which was viewed as a positive early on in trading. However, as the day went on, we saw the stock market give up those gains while the bond market yields rose to its 2nd highest close of 2023. This indicates that while the inflation news was somewhat positive, there is still concern that inflation will remain sticky and above the Fed’s target, leading to higher for longer rates. The bond market can be a good indicator of where the Fed and rates will be headed in the future, and we continue to watch it closely.

U.S. Debt Downgrade – This was big news last week when Fitch downgraded U.S. debt from AAA to AA+. It did cause a steep decline in stocks the following day, however we think this is more of a blip than anything to be overly worried about. It’s less of an indictment on the U.S. economy and more of a worry about our politicians in Washington being able to compromise for the good of our country. The latest debt ceiling talk is the main culprit, and as we know they didn’t fully solve it and just kicked the can down the road until January 1st, 2025. I think the key line from the downgrade were the words “erosion of governance.” Sounds about right!

Volatility – We’ve seen increased volatility over the last few weeks. Is it something to be overly concerned about? We don’t think so, not yet anyways. There’s lots of data that show in strong up markets like we’ve seen to start 2023, it’s not uncommon for a pullback to occur in the 3rd quarter. August and September tend to be weaker months in this type of environment, and a cooling period may be a good thing for stocks. Economic data continues to be strong and the bond market isn’t pricing in any economic uncertainty at this point. We tend to like how our portfolios are currently positioned in this type of market.

I hope you all have a wonderful weekend and please don’t hesitate to reach out to us with any questions you may have. We appreciate your trust in us as always.

Ryan Bouchey, Chief Investment Officer

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