The market in 2020 gives me A LOT of potential topics to address, sometimes it's hard to choose.
This week, I narrowed them down to these Three Things to consider....
1) International vs. US Stocks
2) Big Companies and Market Dominance
3) Defending Your Optimism
I love the United States, it's the best country in the world to live in.
I also believe it's the best place for the majority of investor's stock allocations... and its stock market has been on quite a run when compared to its international peers.
The chart below shows this:
The chart above shows the values of the S&P 500 Index’s returns minus the MSCI World ex USA Index’s returns. When the line is above 0, domestic stocks outperformed international stocks. When the line is below 0, international stocks outperformed domestic stocks.
While I certainly hope US stocks continue to perform favorably, history suggests that international stocks may soon turn a corner.... Since 1974, US stocks have outperformed international for an average of 7.6 years before switching places. We’re currently 9.1 years into this cycle of US outperformance, so perhaps we may be nearing a transition.
However, the longer that the US outperformance continues, the harder it gets to believe that it will eventually turn. In psychology, this is called the availability heuristic , which has us believing that recent events in our memory are given a high expectation of continuing into the future.
I'm bullish on the entire system, US and International. Trying to be 100% invested in the outperforming segment is a difficult and impractical game to play, and thoughtful diversification is what makes the most sense (to me).
Data Source: Morningstar and Hartford Funds, 4/20. Past performance does not guarantee future results. The performance shown above is index performance and is not representative of any Hartford Fund’s performance. Indices are unmanaged and not available for direct investment.
US equity is represented by S&P 500 Index; International equity is represented by the MSCI World ex USA Index. For illustrative purposes only.
Companies are getting BIG.
Amazon. Microsoft. Alphabet, and Apple are each worth about $1,000,000,000,000 or more...that's a TRILLION (I had to double-check the number of zeroes a couple times.. I"m not used to going 4 commas deep).
Consider a top-heavy stock market with the largest 10 stocks accounting for over 20% of the total market (i.e. market capitalization) and a marquee technology firm perched at No. 1 based on size...This sounds like a description of the current US stock market, dominated by Apple and the other FAANG stocks, right?
This is actually a reference to 1967, when IBM represented a larger portion of the market than Apple at the end of 2019 (5.8% vs. 4.1%).
As you can see, the sheer size of the overall market has grown enough to keep these trillion-dollar companies from being an abnormally disproportionate part of the market.
A breakdown of the largest US stocks by decade in the chart below shows some companies have stayed on top for a long time. AT&T was among the largest two for six straight decades beginning in 1930. General Motors and General Electric ranked in the top 10 at the start of multiple decades. IBM and Exxon were also mainstays in the second half of the 20th century. Hence, concentration of the stock market in a few large companies such as the FAANG stocks in recent years is not a new normal; it is old normal.
Moreover, while the definition of “high-tech” is constantly evolving, firms dominating the market have often been on the cutting edge of technology. AT&T offered the first mobile telephone service in 1946. General Motors pioneered such innovations as the electric car starter, airbags, and the automatic transmission. General Electric built upon the original Edison light bulb invention, contributing to further breakthroughs in lighting technology, such as the fluorescent bulb, halogen bulb, and the LED. So technological innovation dominating the stock market is not a new normal; it is an old normal too.
The only constant is change, and the more things change the more they stay the same. This seems an apt description of the dominant stocks atop the market. While the types of businesses most prominent in the market vary through time, the fact that a small subset of companies’ stocks account for an outsized portion of the stock market is not new. And it remains impossible to systematically predict which large companies will outperform the stock market and which will underperform it. This underscores the importance of having a broadly diversified equity portfolio that provides exposure to a vast array of companies and sectors.
When I was in junior high school, my dad and I were talking after I received a subpar grade. I remember saying to my him, "but dad, I'm the smartest of my friends.".
To which he responded "It sounds like you need some smarter friends."
I loved my friends at the time, but that was a bad justification on my part and good advice from him.
Clearly my dad didn't invent this concept; it's been iterated many times over. Perhaps most notably, Jim Rohn famously claimed "You are the average of the five people you spend the most time with."
That's definitely true. But here's the thing:
2020 has been a rollercoaster and the new five people we're spending the most time with right now may not be people at all. In fact, during 2020 I'm sure some of them are newscasters or social media or radio shows, etc...
Regardless of where you stand on the economic crisis, the pandemic, the social unrest, and the political climate, it's definitely understandable to be feeling some kind of psychological fatigue from it all -- I totally understand.
In the midst of that fatigue it can be difficult to stick with a financial plan and investment strategy...So how can we do it?
There's only one strategy: optimism.
Optimism is undefeated for long term investors...
Defend your optimism, it's the most important thing. If your circle of influence is killing your optimism, it may be time to consider a substitution.
I'm certainly not trying to downplay the issues we're faced with, but I'm a perma-bull on the future of our society. I hope you are too.
I'll leave you with this recap I've seen shared on social media in recent months. I hope you feel it adds valuable perspective:
It’s a mess out there now. Hard to discern between what’s a real threat and what is just simple panic and hysteria. For a small amount of perspective at this moment, imagine you were born in 1900.
On your 14th birthday, World War I starts, and ends on your 18th birthday. 22 million people perish in that war. Later in the year, a Spanish Flu epidemic hits the planet and runs until your 20th birthday. 50 million people die from it in those two years. Yes, 50 million.
That's all for this week's email.
Adam Harding, CFP
Three Things: Int'l, Big Stocks, Optimism
June 29, 2020