FINANCIAL MARKET UPDATE 9.7.2021

AUTHOR: JOSH JENKINS, CFA

STORY OF THE WEEK

INTERNATIONAL DIVERSIFICATION IN CHARTS

As consumers, we utilize products from non-US companies every day. Whether it is the car we drive, the clothing we wear, the TVs in our homes, or the phones in our pockets, many of the goods we purchase were at least partially manufactured abroad. While consumers are typically diversified when it comes to buying goods, the same is not always true for investors buying stocks.

Many investors exhibit ‘home country bias,’ which is the tendency to over-allocate to the country in which they live. Not only do investors exhibiting this bias forfeit the benefit of additional diversification, but they also miss out on the potential for improved returns, as valuations in non-US markets generally appear less stretched.

The chart below illustrates how the total value of the global stock market is distributed across countries. As you can see, the US market is by far the largest, comprising about 57% of the global market capitalization. An investor concentrated in US investments is missing out on nearly half of the investable equity market.

Percent of World Equity Market Capitalization

In USD. Market cap data is free-float adjusted and meets minimum liquidity and listing requirements. Dimensional makes case-by-case determinations about the suitability of investing in each emerging market, making considerations that include local market accessibility, government stability, and property rights before making investments. China A-Shares that are available for foreign investors through the Hong Kong Stock Connect program are included in China. 30% foreign ownership limit and 25% inclusion factor are applied to China A-Shares. Many nations not displayed. Totals may not equal 100% due to rounding. For educational purposes; should not be used as investment advice. Data provided by Bloomberg. Diversification neither assures a profit nor guarantees against loss in a declining market.

Of course, it is impossible to know in advance which country will perform the best. The chart below illustrates the relative performance across major stock markets over the last twenty years. During this period, the US stock market delivered a 7% per annum return. While that return ranks highly, there were other countries that did better.

Developed Market Return Comparison

Past performance is no guarantee of results. In USD. MSCI country indices (net dividends) for each country listed. Does not include Israel, which MSCI classifed as an emerging market prior to May 2010. MSCI data © MSCI 2021, all rights reserved.

The most important takeaway from this chart is that there is no discernable pattern in the performance rankings over time. As a result, it is unlikely an investor would be able to outperform a diversified international stock allocation by attempting to identify the winners and losers from one period to the next.

One of the biggest benefits of owning a globally diversified portfolio is that it smooths the investor experience. For example, the US market spent several years as one of the worst-performing countries and several others as one of the best performers. That sort of roller coaster ride has the tendency to derail investors from their long-term plan. A great example of this is the “Lost Decade,” which took place from 2000-2009. During that episode, the US market (S&P 500) lost 9.1% of its value on a cumulative basis. The rest of the world performed significantly better during this period. Investors that were diversified into other stock markets around the world have had a much better experience.

Global Index Returns

January 2000 – December 2009

Source: DFA. S&P data © 2020 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. MSCI data © MSCI 2020, all rights reserved. Indices are not available for direct investment. Index performance does not reflect expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results.

Nearly half of the world’s equity market value exists outside of the United States. Diversifying equity exposure internationally can potentially reduce volatility and smooth out periods of extreme performance disparity. In recent years, the US has generally outperformed the international stock market as a whole. With valuations looking cheaper abroad, diversifying internationally may also increase expected returns moving forward.

WEEK IN REVIEW

  • The top story from last week was the disappointing jobs number. The economy added 235,000 new jobs in August, much lower than the 720,000 jobs economist were expecting or the roughly 1 million from each of the prior two months. The services sector that involves in-person interaction saw particularly weak job growth, suggesting that the Delta Covid strain is dampening economic activity.
  • The weak jobs number has created some speculation that the Federal Reserve may delay the tapering of its asset purchase program that might have otherwise begun following the FOMC meeting this month.
  • This will be a very light week in terms of economic data releases. The initial jobless claims data will likely be the most watched in light of the week jobs figure published last week.

ECONOMIC CALENDAR

Source: MarketWatch

HOT READS

Markets

  • Jobs Report Disappoints – Only 235,000 positions added vs. Expectations of 720,000 (CNBC)
  • Major Automakers Fear the Global Chip Shortage Could Persist for Some Time (CNBC)
  • Fall’s Economic Comeback Turns Into a September Slowdown (WSJ)

Investing

Other

  • The First Thing to Understand about NIL Is That Nobody Fully Understands NIL (SI)
  • Google’s Quantum Computer Achieves Chemistry Milestone (Scientific American)
  • 11 Ways to Upgrade Your Wi-Fi and Make Your Internet Faster (Wired)

MARKETS AT A GLANCE

Source: Morningstar Direct.

Source: Morningstar Direct.

Source: Treasury.gov

Source: Treasury.gov

Source: FRED Database & ICE Benchmark Administration Limited (IBA)

Source: FRED Database & ICE Benchmark Administration Limited (IBA)

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ABOUT THE AUTHOR

402.763.2967

jjenkins@lutz.us

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JOSH JENKINS, CFA + CHIEF INVESTMENT OFFICER

Josh Jenkins is the Chief Investment Officer at Lutz Financial. With 12+ years of relevant experience, he specializes in assisting clients with portfolio construction, asset allocation, and investment risk management. He is also responsible for portfolio trading, research and thought leadership as well as analytics and operational efficiency for the Firm's Financial division. He lives in Omaha, NE, with his wife Kirsten.

AREAS OF FOCUS
  • Asset Allocation
  • Portfolio Management
  • Research & Data Analytics
  • Trading System Operation & Execution
AFFILIATIONS AND CREDENTIALS
  • Chartered Financial Analyst®
  • Chartered Financial Analyst Institute, Member
  • Chartered Financial Analyst Society of Nebraska, Member
EDUCATIONAL BACKGROUND
  • BSBA, University of Nebraska, Lincoln, NE

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