A Tale of Two Cities
Dickens opens his famous novel with this now famous refrain; “It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of light, it was the season of darkness, it was the spring of hope, it was the winter of despair…….. Dickens is contrasting the cities, and the lifestyles, of London and Paris before and during the French revolution. While it may be hyperbole, we would use the same refrain to compare the current economic situation of U.S. cities compared to the rest of the world. For the United States it has figuratively been the best of times for their economy, for Europe and Asia it has figuratively been the worst. At GreenPort, our investors have been and continue to be overweight U.S. equities relative to the rest of the world. While this has treated our investors well, we’ve written about our insecurity in betting on the home town team. We fear that our home town bias might impact our decision making. It would be like betting the Patriots to win the Super Bowl each year just because we are from New England. Actually, that’s a bad example. Regardless, we need to use our heads and not our hearts to be successful investors. U.S. stocks have handily outperformed the rest of the world since the bull market began.
Our core beliefs in forecasting global stock markets are that stock markets represent the fair present market value of future corporate earnings, and that corporate earnings are a product of economic growth. As we’ve recently seen, markets aren't fairly valued at all times. Prices can swing up and down rapidly for a variety of reasons. Our process doesn’t focus on the shorter-term movements of stock prices, we focus on the longer-term fair value. Our explanatory power is much stronger over longer periods than shorter periods. This doesn’t mean we don’t feel the anxiety of short-term movements in stock prices, it simply means we don’t think we can effectively forecast and take advantage of short-term stock movements. Currently, longer term economic growth patterns strongly favor the U.S.
U.S. earnings have been much stronger than European and Asian earnings. Perhaps more importantly, the momentum of U.S. earnings are positive, while European and Asian momentum are negative. The U.S. economy, and therefore U.S. earnings, continue to improve. Europe and Asia continue to deteriorate. Of course, it’s never that simple. We must also look at valuation. We must reconcile if the prices being paid for each country’s earnings are too high or too low. An investor only has to pay 12X for European and Asian earnings, they are paying 16X for the U.S.
Is this higher price worth it? Teaser; you will find out after our month end rebalancing of the Core Portfolios. As investment managers, we are concerned with the abnormally large valuation differential that current exists between the U.S. and International markets. We are also concerned that the Fed's new dovish stance on inflation may signal the end of the strengthening Dollar. The Dollar has strengthened 9.5% vs. the Euro over the last year.
We are closely monitoring the global economic situation and it is likely we will reallocate some portion of your equity assets back oversees soon. If the U.S. economy starts to slow down, or international economies start to pick up, the reallocation will be even more significant. What should you consider doing about the current global economic situation? We suggest planning a trip to Europe this summer. The stronger U.S. economy has attracted global capital, dramatically strengthening the Dollar vs. the Euro and U.K. Pound. Europe is on sale for U.S. travelers. Bon Voyage, The GreenPort Team