An Overview of International Stock Markets

International stocks can be a significant component of investor portfolio allocations. However, many of the differences between US and International stock market indices may not be widely known. In the following market reflection, we will provide an overview of international markets, including some of the differences in composition to US markets as well as a comparative analysis of performance.

What comprises “international stock markets”?

Simply stated, international stock markets are made up of all markets outside the US. A good proxy for international markets is ACWX, an ETF based on the MSCI All World Country Index, Ex-US. The following charts reflect data from the index and ACWX to compile a breakdown of international stocks.

Based on the above data, a few observations:

  • Developed markets (like Europe, Japan, Australia) represent 80% of the total international market
  • 5 countries (Japan, UK, China, France, Germany) represent 50% of international markets
  • China is, by far, the largest emerging market. It represents 38.5% of emerging market stocks
  • On a sector basis, Financials (23.6%) is the largest represented sector in international markets compared to Technology stocks (25.2%) being the largest sector in the S&P 500

Performance versus the US markets

2017 was a strong year for international markets. The below chart reflects performance over several periods for US Large Cap stocks (blue bar), International Developed Stocks (orange bar), and Emerging Markets stocks (gray bar). International stocks, both developed and emerging, outperformed US markets in 2017. However, over longer periods, the US markets have outperformed international stocks.

International growth versus value

In regard to US markets, growth stocks have significantly outperformed their US counterparts in 2017 and into 2018. This trend has been seen in International markets as well. The below chart reflects performance of both US and international broad market, growth, and value stocks. In 2016 (blue bar), value stocks in both the US and international markets outperformed. In 2017 (orange bar), this trend reversed as growth stocks outperformed in both regions. Thus far in 2018, we have seen the same outperformance in growth in the US while the international stocks are more mixed.

Our international allocations and outlook

We are currently advocating for a balanced approach to US versus international stock allocations. While economic conditions and corporate earnings are favoring the US, valuations are favoring international stocks. Within our portfolios, there are several methods to gain exposure to international stocks.

  • The G40i provides growth and income from high quality, dividend paying international stocks. The G40i is a very strong complement to G50 allocations as the investment philosophy is similar, but is invested completely outside the US.
  • The ETF Endowment Series has allocations to international stocks across the conservative through growth spectrum.
  • The Gradient Tactical Rotation (GTR) invests in one geographic sub-sector through a rules based tactical strategy based upon price momentum. The current allocation is fully invested in Emerging Markets stocks

In closing, it is our belief that an allocation to international stocks can be beneficial for diversified growth in investor portfolios. We believe that providing various sources of portfolio return, which includes asset class, geographic locations, and sector diversification, creates long term portfolio benefits that may enhance returns and lower volatility over time.

To expand on these Market Reflections or to discuss any of our investment portfolios, please do not hesitate to reach out to us at 775-674-2222.

 

Posted on March 27, 2018 Read More

Trade Tariff Discussion

In early February, volatility returned to the stock market. Investor concern over rising interest rates and the fear of inflation were to blame for an approximate 10% peak to trough market correction. In early March, President Trump introduced a new set of trade tariffs; steel imports will be hit with a 25% tariff and aluminum imports with a 10% tariff. The tariffs will begin March 23rd and this has triggered another round of investor concerns.

Not only are investors concerned, but politicians (both Democrat and Republican), US trading partners internationally, and economists are raising concerns regarding:

  • This is a protectionist shift from the administration
  • The tariffs could spur retaliation (trade war) from our foreign trading partners
  • That tariffs will be a detriment to US economic growth
  • Consumers will face increased prices due to higher cost steel and aluminum
  • Rising costs for businesses that rely on the metals to manufacture their products

Traditionally, tariffs have not been positive for economic growth. They are a tax on imports designed to boost US production of goods. The idea is to push up the price of foreign goods to make the US-made option more attractively priced. In this case, the President is attempting to get companies to use more US produced steel and aluminum.

For many industries the cost to produce their goods will increase due to the tariff. Examples are beer, auto, home builders, oil and gas drillers and packaged food companies who all use steel and aluminum in the manufacturing process. These companies will either be forced to absorb the costs or pass the costs on to consumers. Either way, it’s a negative for corporate profit margins and/or an additional sales tax from increased prices for consumers.

Additional harm could result if US tariffs sets off a global trade war as tariffed countries retaliate by imposing tariffs of goods the US exports to their country. At the least, this is likely to escalate trade tensions with our global trading partners. Below is a chart of the largest importers of steel to the US:

Mitigating this is the fact that the amount of steel produced in the US is far greater than the amount we import. See chart below:

Currently the tariffs are only on steel and aluminum. And the administration is already creating exemptions for Canada and Mexico from the tariffs, while other countries who are allies to the US can file for exemption. Many of the final details remain unknown, but if this is the extent of the tariffs, the impact on the economy and the stock market should be minimal. As further details on the US tariffs and retaliatory tariffs put on US goods emerge we need to closely analyze their effects.

Regardless of the extent of the current tariffs, any policy that detracts from free global trade is not going to be received well from investors. Wall Street will always be concerned about government policies that have the potential to raise costs for corporations, increase prices for consumers and slow the economy.

To expand on these Market Reflections or to discuss any of our investment portfolios, please do not hesitate to reach out to us at 775-674-2222.

Posted on March 12, 2018 Read More

VOLATILITY: IT’S BACK

The long awaited market correction became a February reality as stock prices fell 10% from their January highs, quickly unnerving investors. This move lower was expected and long overdue. Actually it was the first down February since the infamous February, 2009. The correction came swiftly as volatility spiked and values evaporated in the blink of an eye. Maybe mom was right and it is less painful just to rip the band aid off versus peeling it back slowly. Regardless, a 10% correction still stings.

The silver lining in this dark cloud was the immediate 5% bounce back in stock prices. Investors barely had the opportunity to assess the damage of the original 10% sell off. By the end of the month, some of the initial correction had been reversed but the markets were still under water. What lessons can we take away as we begin our journey through 2018?

Corrections are normal. In an average calendar year, one would expect the stock market to have three price corrections in the 5-10% range. The fact the market went for two years without a meaningful correction is the exception, not the rule.

Don’t let sudden price changes take you off your game. Volatility is likely to remain elevated in the months ahead. While we are sticking with our mid-single digit return expectations from stocks this year, it may come with more intra period price movements than last year. Economic growth is strong, corporate profits are rising and the new tax bill should provide a tailwind. Still, the market will need to come to grips with higher interest rates, risk of higher inflation and corporate earnings variability as we learn the impact of the new tax law.

Allow yourself to think like a contrarian. Last month, we discussed the concept of rebalancing portfolios during periods of extreme market strength or weakness. It’s okay to buy low and sell high. If markets revisit recent highs consider a portfolio rebalance to reduce risk. If markets retest recent lows or make new ones, think buying opportunity.

Obviously February was a rocky month. The benchmark S&P 500 was down 3.7% for the month to close at 2,713.83. This still leaves the benchmark positive for the year with a 1.8% year-to-date return. With earning’s season in full swing, the fact that many companies reported revenues and earnings which beat consensus estimates is helping to stabilize the market. A record high number of S&P companies issued positive EPS guidance for this year, raising the 2018 consensus estimate by 7% just since the start of the year. These results are driven in part by the decrease in the corporate tax rate for the year based on the U.S. tax reform legislation. An improving global economy and a weaker U.S. dollar are other factors supporting stronger profits from U.S. corporations.

International and emerging market stocks were not immune to the global market volatility. These two broad sectors also posted negative returns for the month, down 4.5% and 4.6% respectively, but hanging on to year-to date gains of 0.3% and 3.3%.

Bond prices declined as interest rates rose, with the benchmark 10-Year U.S. Treasuries now yielding 2.87%, up 47 basis points in just two short months. The yield curve steepened slightly during the interest rate rise in February. The 2-Year Treasury rose by 11 basis points to finish February at 2.25% while at the long end, the 30-Year Treasury rose 18 basis points to end the month at 3.13%. With the economy gaining momentum, there is a very high probability the Federal Reserve will raise the Fed Funds rate by 25 basis point at their March meeting.

The financial road will be bumpy at times. The market is digesting transitory data related to new signs of wage inflation, higher interest rates, the unwinding of central bank monetary accommodations and a Federal Reserve under new leadership with Chairman Powell. On the other hand, fundamentals are still very positive. Consumer confidence is soaring, home prices are steady, unemployment is low, lower taxes are just beginning and corporate profits should experience double digit growth again this year. While the headlines are designed to scare you into reading, watching, or trading take comfort in the fact the economy is strong and long-term investors with a plan will be rewarded for accepting and properly managing risk.

MARKETS BY THE NUMBERS: 

To expand on these Market Commentaries or to discuss any of our investment portfolios, please do not hesitate to reach out to us at 775-674-2222

Posted on March 2, 2018 Read More
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