3 Reasons U.S. Stocks Are Outperforming the Rest of the World
August 21, 2018
By Krista Biernbaum • Securities Analyst II
Last year was a phenomenal year for the markets.
We saw low dispersions in returns. Hitting new all-time highs became the norm. Day-to-day volatility was non-existent, and almost all global markets marched together. This has changed in recent months — U.S. stock returns have diverged from the rest of the world. This is evidenced in the below chart from the Wall Street Journal’s The Daily Shot®. What gives?
Three Reasons Why U.S. stocks Are Stronger
1. U.S. Economic Backdrop
One reason U.S. stocks are outperforming is a strong U.S. economic backdrop. Gross domestic product (GDP), the value of all goods and services produced within a country, shows the U.S. economy grew 4.1% on an annualized basis in the second quarter. Also, economists are forecasting that we could see 3% GDP for the calendar year. It has been several years since we have seen that level of growth. Corporate earnings are solid, as U.S. companies recorded strong and broad based earnings growth in the first half of the year.
2. Trade Tariffs
Another reason: trade tariffs. This topic has dominated the headlines over the past couple months. While there are several tariffs proposed, only a minimal amount of tariffs are currently in effect. If the various proposed tariffs go into effect at some point, they will inevitably have an impact on economic growth. However, most experts believe they would negatively affect the rest of the world, more so than the U.S., so America would would continue to outperform international markets.
3. Stronger Dollar
A third reason is the stronger dollar. The U.S. dollar has appreciated this year against most other currencies. The sources of the strength include those items discussed above, plus the traditional role of the U.S. dollar as a safe haven in volatile times. A stronger dollar makes our goods more expensive to other countries, and they receive less for goods sold to the U.S. This can hurt countries dependent on trade, particularly emerging markets.
What does this mean for your portfolio?
While it is tempting to load up on the assets that have done well thus far this year, it can add additional risk to your portfolio. Keep in mind that this level of divergence in returns between the U.S. and the rest of the world will not last. At some point, we will see a reversion to the mean. When this will occur, no one knows. In the meantime, we will remain broadly diversified with exposure to both U.S. and international markets.
Our primary task is to build portfolios that fit your long term needs, not our short term expectations. Talk to an advisor today to ensure you’re in the best possible position to meet your goals.