Is the United States Stock Market Due?

2009, a year that surprised most “experts”, saw the emerging markets lead.  From the March 2009 “generational low”, the MSCI Emerging Markets Index rose 108%.  (Yes, one hundred eight percent.)  And while the vast majority of  investors  are determined to chase the returns provided by the emerging markets in 2009, two famous investors, who were very negative on the US stock markets for the last couple of years, are now singing the praises of the stock markets in the US.   Marc Faber, author of “The Gloom Doom and Boom Report”, a monthly investment newsletter, recently stated in an interview that “the US markets are likely to outperform emerging markets in 2010.”  And Dennis Gartman, author of “The Gartman Letter,” a daily commentary of the global capital markets, stated on December 31st that he will “buy the dollar and the stock market” in 2010.

Is 2010 the year the stock markets in the United States begin to lead the world again?

Because of  the statistical phenomenon known as Reversion to the Mean - simply a “return to the average” - many believe that it is just a statistical inevitability that the US stock markets will be positive in 2010 and through the next decade.  After a return of -1.15% per year from 2000-2009 (through November) some predict that, like a gambler who has endured a long losing streak, the US stock markets are “due”.

S&P 500

1930 -1939     -0.05%

1940-1949     9.17%

1950-1959     19.35%

1960-1969     7.81%

1970-1979     5.86%

1980-1989     17.55%

1990-1999     18.21%

2000-2009     -1.15%  (through November)

1926-2009        9.79% (through November)

Should we be concerned whether the United States stock market will lead the world again or not?  Absolutely not!  As investors chase returns and consider chasing returns in the US and the emerging markets, we must be aware of Japan’s stock market over the last 20 years.  On December 29, 1989, the Nikkei 225, Japan’s stock market benchmark, was at 38,957.  Twenty years later, on December 30, 2009, the Nikkei 225 closed at 10,546.44.  A whopping 73% decline!  There are myriad theories as to why this has happened, but as an investor, why something happened is no where near as important as how a portfolio is positioned.  (By the way, Japan had the best stock market return of the developed markets in 2008: -29.21%)

In the last 25 years, the S&P 500 has never led the developed markets in returns. (See chart here.)  Is this the year?  We don’t know and will never claim to know.  Here is what we do know:

1. Our clients are long-term investors and our portfolios are built as long-term investment vehicles.
2. Over time, stocks are going to out-perform bonds.
3. Over time, small companies are going to out-perform large companies.
4. Over time, value companies are going to out-perform growth companies.
5. Over the last 25 years, the United States stock market has never been the best performer relative to other developed countries
6. Over time, emerging market companies are going to out-perform companies in the United States.
7. Capital flows to where the expected return is the greatest.

If it was possible to know which area of the world or which asset class was going to produce the greatest return in the coming year, we would definitely adjust our portfolios.  However, because it is impossible to know, our portfolios will continue to be positioned in a broadly diversified manner to both maximize long-term returns and minimize risk.

To your success!

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