A Financial Eclipse of Sorts

I hope that you had a chance to catch a glimpse of Eclipse 2017 - either through a pair of NASA approved "eclipse glasses" or via an Internet stream. Boy, what did we ever do before the Internet? Just as the moon eclipsed the sun, the performance of Domestic Equities have eclipsed International Equities (and every other asset class). The main difference between these two events? The solar eclipse lasted a few minutes, while Domestic Equities have been favored over International Equities for more than seven years now!

Each day I evaluate the relationship between the six major investment assets classes; Domestic Equities, International Equities, Fixed Income, Commodities, Currencies, and Cash. Through this daily evaluation I see where the strength in the markets lie. It is a fools errand to try and predict what the markets will do, rather I watch and identify market trends. In other words, I prefer to listen to what the markets are telling me rather than try and tell the markets what I think they should do.

Since the beginning of 2017, International Equities have closed the gap considerably on Domestic Equities. Does this mean that it is inevitable that International Equities will become the top ranked asset class. Not necessarily. But it does make it far more plausible. Over the last seven years, we have witnessed the U.S. stock markets sustain a sizable performance advantage over the International markets. The following chart clearly shows this fact.

This invariably brings up the question, "Why don't we just invest all of our money in U.S. stocks?" Not so fast! Unfortunately, things are not quite that stable. No too long ago, we witnessed the polar opposite in this performance relationship. The following chart shows that in August 2003, International Equities became the higher ranked asset class and for the next five years they outperformed Domestic Equities handily. Much like we have seen with the U.S. markets in more recent memory, the performance advantage for International Equities was both dramatic and sustainable over a long period of time. 

I share this historical perspective for two reasons. First, it seems as if the financial news is full of stories about the coming U.S. stock market collapse. No one knows for sure how long this Domestic Equity outperformance will last. And to predict its demise with certainty is harmful to investors who heed such advice. As demonstrated, outperformance can persist for extended periods of time. And second, putting all of your eggs in one basket (like Domestic Equities) can lead to subopitmal results for extended periods of time. This is why I don't believe in trying to predict the market's next move. Instead, I believe in positioning investment assets to take advantage of prevailing trends. When these trends change, so does the portfolio. In order to manage portfolio risks, you must adapt.