The U.S. bull market that began in early 2009 started with broad gains and little differentiation among individual stocks. But, over the past half-dozen years, it has shifted. Since then, a handful of pricey, mega-sized technology companies has driven the U.S. stock market.
On a cap-weighted basis, four-fifths of the so-called FAANG stocks (Facebook, Amazon, Apple, and Google) plus Microsoft surged by more than 50% for the year to date as of August 31, 2020. For the same period, however, the other 495 stocks in the S&P 500 Index were essentially flat. And despite the S&P 500 ending August 2020 up by close to 10% for the year to date, most of the companies in the Index were down for the year.
It may be tempting to ignore non-U.S. stocks given the astonishing outperformance of US-based technology companies in the past half-dozen years. Since the conclusion of the Global Financial Crisis at the end of the first quarter 2009, investors have benefited from directing their equity allocations exclusively to U.S. companies, rather than splitting it up between U.S. and foreign stocks. But there are reasons to think this won’t continue.
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Leadership is Cyclical
Historical parallels are easily seen when comparing the outperforming companies in the current U.S. stock market with the global outperformers from years past. When looking at long-term performance over many decades, stocks that outperform in one decade often tank later and what seemed to be a “sure thing” inevitably took a turn for the worse over the next 10 years. That is why chasing performance is rarely a successful strategy over the long term.
Think back to the 1980s. Six of the top 10 stocks in the world, based on market capitalization, were energy companies. That sector later suffered as demand dropped while increased oil production drove a glut on the world market.
Another example: at the end of the millennium, the performance of the stocks of NASDAQ-listed U.S. companies appeared too good to be true as the Tech Bubble expanded. Many investors were caught off guard when that bubble eventually burst.
Eventually, the current U.S. mega-cap technology winners of the past five or six years will fade, and stocks from another sector – and possibly region – will reign.
Big Tech Valuations vs. The World
Here is some perspective: let’s compare the prices of those five technology companies mentioned at the beginning of this blog post to larger segments of the world economy.
At the time of this writing, the combined value of Amazon, Apple, Facebook, Google, and Microsoft is higher than the value of the stock markets of Canada, South Korea, Brazil, and Russia combined. You could also buy every single company on the German, U.K., Italian, South African, and Israeli stock-market exchanges for less than the combined value of these five U.S. technology companies.
It’s dangerous to assume that this group will continue to drive U.S. market returns. Companies (both domestic and foreign) that are more reasonably priced and have sustainable fundamentals may be an appealing alternative when pricey U.S. tech stocks inevitably fall from grace. History has shown that global stock leadership changes over time and the disproportionate influence of this handful of expensive tech stocks in the S&P 500 Index presents a real opportunity to benefit from diversification through non-U.S. stocks.
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