World equity markets are volatile. They go up and they go down. Sometimes these markets correlate closely, meaning that they make similar moves up and down. At other times, one would be hard pressed to find any correlation in performance and behavior from one region to another.
Again in 2016 large U.S. companies have dominated the winners circle. It is unusual that the U. S. equity markets outperform the developed world for such an extended period. It is also unusual in that small companies, historically more volatile and risky than investing in large companies, have also consistently lagged large U.S. companies.
What scares me most is the large flow of funds into large U.S. companies. Many investors have been reading the headlines, and after an 8 year bull run and period of appreciation, are abandoning their global diversification and flowing billions of dollars into U.S. based index funds. According to the Wall Street Journal, domestic index-tracking mutual and exchange-traded funds pulled in a collective $429 billion in 2016.
We believe that one potential reason for the current market activity is “recency” bias. Recency bias means that investor behavior is often influenced by what has happened or what occupies the headlines recently. We believe it is recency bias that kept investors from making large bets on equity markets after the 2008 market losses.
But fast forward to today, and investors are still thinking that large U.S. companies are the only place to invest. And while that may still hold true by the end of 2017, take a look at other recent events that investors shied away from because of recency bias.
Oil, which has had a horrible run over the past few years was actually the brightest spot in the U.S. equity markets in 2016. Brexit is yet another headline that caused investors to shy away from UK investments, yet the UK FTSE 100 index led all European equity markets with healthy gains in 2016.
My point here is not to suggest that you should invest in oil or the UK, but to suggest that ignoring areas of investment just because they weren’t on last year’s winners list may not be smart.
The USA makes up less than half of world GDP. This means that more than half of the world’s goods and services are manufactured and delivered in other places. That alone should be enough to suggest that a properly diversified portfolio could include equities of companies not based here.
Today, there’s a fair amount of optimism for U.S. investors; a strong dollar, favorable economic policy and possibly lower tax rates. But remember, these are equity markets that we are talking about and things can happen that may shock us all
John P. Napolitano CFP, CPA is CEO of U.S. Wealth Management in Braintree, Mass. Visit JohnPNapolitano on LinkedIn or uswealthnapolitano.com. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. John Napolitano is a registered principal with and securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through US Financial Advisors, a Registered Investment Advisor. US Financial Advisors and US Wealth Management are separate entities from LPL Financial. He can be reached at 781-849-9200.