U.S stocks have trounced overseas markets in 2019, extending a dominance that has lasted for years. But why should you care?
Because if you want the strongest possible retirement portfolio this late in a bull market, you should look deeper into these trends and consider blending stocks from around the world.
Most people claim foreign stocks lag U.S. shares because of Europe’s lousy economy and political drama, or because of tariffs. That's an alluring story, but wrong. U.S. leadership is all about tech.
Strip out tech and techlike communications stocks and U.S. stock returns closely match Europe. Through late September, U.S. stocks were up 21% year-to-date, versus Continental Europe’s 16%. Exclude tech and that gap narrows — 18% for the U.S. and 16% for Europe.
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Europe simply doesn’t have enough tech to lead when tech is winning globally. About 22% of the market value of the Standard & Poor's 500 index is Tech. Only 7.5% of the MSCI Europe index, excluding the U.K., is tech.
Europe doesn't have many techlike, non-tech stocks, either.
In America, many techlike stocks live in the S&P 500's new Communication Services sector. Formed last year, it blends telecom, media and entertainment. When created, it took Facebook and Google and plopped them in a category called “Interactive Media & Services.”
Now, Communication Services is 10.5% of U.S. market capitalization. Almost half of that is tech-like. European Communication Services is only 4.5% of MSCI Europe, excluding the U.K., and nearly all of that is telecom — not at all techlike.
That difference matters. Year-to-date, America’s Communication Services sector is up 24%. Europe’s? Just 2%.
So target American tech and techlike names. You’ll find a smattering in Consumer Discretionary (like Amazon) as well as Communication Services.
Add some American non-tech names for diversity, but get much of that outside America. How?
Emphasize stock types that usually shine late in a bull market’s life. Skip small, cheap companies with high dividend yields. Instead, you want “growth” stocks — firms with rising revenue and profits, brand names everyone knows, diverse product lines and huge global presence. Big, high-quality stocks.
Relative to sectors and industries, those that have led this year probably keep leading for the remainder of this bull. That’s how it usually works. Those that have lagged lately probably keep lagging irregularly. Here, too, look within sectors to find the best stocks.