Staying Home or Going Abroad?
I am writing this in the early evening on Election Night in the US. I have no idea what the outcome of the election is / will be as I type. A lot of people who are more expert on politics and elections will be opining throughout the night and the days ahead. I will leave it to them. I am more concerned with the market’s reaction to the news. As I wrote yesterday, I am trading this week only when it fits with my pre-defined plans. Here is another reason why I am sitting on my hands, for the most part, which I shared on Twitter.
Investors and non-investors all over the world are going to be laser focused on the United States tonight and in the days ahead. We all know why, but that’s not what’s on my mind. Yes, the election and the outcome are important but, I have said all I have to say about that for now.
Instead, I started to think about the “home country bias.” The tendency for investors to keep the majority of their investments focused on the country in which they live. For most of us, the United States might as well be the center of the universe. Investors tend to invest in what is familiar. We probably feel like we know a lot more about Amazon (the company and the stock) than we do about China’s Alibaba (the company and the stock). I know that as I take a look at what I own, there is a very heavy weighting to the US.
For the better part of the past two years, that has largely been the correct decision here. The lower portion of this chart shows how the iShares Core MSCI Total International Stock ETF (IXUS) has performed relative to the S&P 500. All of that red is when the “rest of the world” has been underperforming the key US index.
But, we may get to the point where it makes sense to be invested more heavily outside the US. Maybe that is beginning now? Look at the far right of the lower part of the chart which shows the relative strength indicator (created by the founder of my company, Marc Chaikin) beginning to turn green. Yes, it’s early. Yes, it could be a false signal as it has been a few times in the past two years. Yes, I am still taking notice of it.
Another reason to consider the “rest of the world” is due to the fact that the US, is “only” ~23% of global GDP according to Investopedia, using IMF data. We are still the biggest game in town, but are we really the only game in town? Given this, are there other parts of the world that deserve a look?
The GDP information is interesting but I tend to focus on relative strength a lot more. When looking at different opportunities, I would prefer to own the one that is outperforming:
Choice A is going up more than Choice B
Choice A is going down less than Choice B
Choice A is going up while Choice B is going down
So again, staying “home” has been the better choice. But what if that changes? What if the outcome of this election is a catalyst for that change? What if the aftermath of COVID is a catalyst for this change? I truly don’t know the answers here. I will just have to watch the trends as they unfold and keep an open mind.
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