By Michael Allison, CFA
This week’s Chart comes from my old friend, Francois Trahan, who I’m excited to have reconnected with and follow once again. Here are his thoughts on the Chart:
Well this one got my attention. That said, I can't say that I find it surprising at the end of the day. The 2010s were ripe for Growth strategies given ZIRP, sluggish global economic growth, and a string of crises around the world (Greece/Spain/Portugal, Abenomics, peak investment in China, etc.). The S&P 500 happens to have more exposure to Growth than most major equity indices around the world, and the typical EM market has very little if any. I don't think the proposed policies of the new administration are going to work out well for the denominator in this story (i.e., rest of the world), at least in the near-term. Still, I do wonder sometimes if the biggest threat to the S&P 500 might just be a broad-based recovery in the world economy. That would make the corollary in this story gain interest in the eyes of investors and gravity might just close this extreme. Source: LinkedIn.
When one looks at the Chart simplistically, it’s easy to just say, “Whoah, there’s one serious reversion to the mean risk right there!”, and consider just allocating portfolios away from U.S. equities in favor of non-U.S. equities, and perhaps by extension commodities as well.
However, even though I am somewhat sympathetic to that view, I also think that it’s just not that simple. For that allocation shift to be the right one, the U.S. dollar needs to weaken against other currencies, and growth must accelerate in Europe and other areas of the developed world.
There are a number of questions about how that does or does not come to pass.
What role will tariffs instituted by the incoming administration play in the direction of the dollar and other currencies? Are they more of a coercive tool to encourage helpful behavior by our trading partners, or will they meaningfully disrupt trade flows?
What role will the encouragement of NATO to pay for more of their defense play in the value of the Euro?
What happens to China’s currency as “Japanification” kicks in and dramatic demographic shifts necessitate major bailouts of real estate and other areas of the local economy there?
To the extent the impact of the new administration’s Department of Government Efficiency (“DOGE”) is more successful than previous attempts at reigning in government spending, would that provide new support for the U.S. dollar?
I believe that it is important for investors to focus on these and other questions in order to be able to make informed geographic and asset allocation decisions in the coming months.
Based on this week’s Chart, one thing I can say with a high degree of confidence…
Change is definitely in the air.
Interested in reading more of Mike's weekly newsletters? Click below to view The Sunday Drive.
Comments