Thursday is America’s 243rd birthday. Patriotism will likely be flowing over. Great, but don’t let patriotism rule your 401(k). You’ll miss a world of opportunity.
Don’t get me wrong – America’s markets are worth toasting at your BBQ. We have the world’s biggest, best, deepest and most liquid markets. Strong property rights, an innovation culture and good old-fashioned capitalism have improved quality of life immeasurably and created immense investment opportunities. Any young person can rationally dream of being the next Sara Blakely or Sergey Brin.
Yet there is a bigger world outside the Land of Opportunity. The U.S. is just 24% of the global economy and 63% of the developed world’s stock market. The other 37% irregularly does better, beating America in 24 of 49 years since 1969.
While all broad, well-constructed indexes usually end up with about the same total returns eventually, they often leapfrog each other for years at a crack. Overseas stocks beat America’s in the 2000s bull market and much of the 1980s. We’ve led in this bull market. Within bull markets, leadership frequently flip-flops, and within this U.S.-led bull market, foreign stocks led in three years (2009, 2012 and 2017).
If you shun Europe, Asia and the rest of the Americas, you miss opportunities to diversify risks.
Do you like tech but fret future regulation of big U.S. tech giants? Target tech names from Japan, Germany, Taiwan or even China. Fed up with mall-based American retailers? Check out French luxury instead, and benefit from the spending of China’s brand-name-mad ascendant rich. The world is your oyster.
Global investing helps manage political risks, too. On April 7, I explained U.S. stocks’ consistent and above-average positive returns in any president’s third year, but with slower gains as the year ages and election-year campaigning poisons sentiment. Your antidote? European stocks, which are entering an unseen political sweet spot after May’s European Parliament (EP) elections.
While rising uncertainty may slow U.S. stocks, European markets are set to benefit from falling uncertainty. Before the contest, everyone dreaded anti-EU populists gaining power. Pundits warned of radicals taking Brussels by storm and sending the bloc into chaos. Few foresaw how populists’ rise across Europe merely pancaked national governments ideologically into gridlock. Populists, both far right and far left, stole support from the traditional center-left and center-right, making coalitions weak and fragile. The most fierce, like Italy’s, now mostly fight internally and legislate almost nothing – gridlocked.
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May’s European Parliament election surprised everyone with more of that. The two traditionally dominant centrist parties won 44% of seats combined, their lowest ever, while far left and far right fringe parties, some newly created – won the rest. While fear of that remains, holding stocks down, the eventual government will be some multiparty hodgepodge agreeing on little and doing even less – bullish gridlock, keeping legislative risk low and defying populist dread. All bullish.
European stocks have one similar political pattern to ours. Like American, EP elections occur regularly – every five years since 1979. In the six months before the prior eight elections, European stocks averaged 2.3% returns, trailing America’s 4.0%. In the six months after the vote, this flips: Europe averaged 10.5%. America averaged 8.5%. In the next 12 months European stocks are positive routinely. The risk-to-reward tradeoff is good.
Investors typically favor their home country. You should. So celebrate the 4th. Enjoy the fireworks. But spread your 401(k) globally – like some to Europe now.