As for where we’re finding opportunity, I would argue non-U.S. markets today are generally mispriced. The focus has been on the U.S., more narrowly on U.S. technology, and even more narrowly on artificial intelligence. So much of the rest of the world’s equity markets are languishing, even as corporate governance has gotten better than it’s ever been. That makes it a fascinating time, full of opportunities.1
In February we shared a chart that tells a really important story: how the ratio of U.S. household net worth to GDP exploded higher over the last 30 years. Other than lower interest rates, we have not seen a good answer for why assets should be valued higher today relative to the size of the economy. And “low interest rates” is not a good answer – using low interest rates to justify high asset prices is (all else equal) simply another way of saying future ROI will be lower.
Here’s a similar chart (courtesy of FT via Cove Street Capital)2, just for U.S. stocks. It shows the relationship between stock prices and adjusted earnings going all the way back to 1881 and it’s also very concerning. But that’s not all: we’ve added red boxes to show the major time periods when stocks performed poorly (1910s, 1940s, 1970s, 2000s). These were all periods with problems related to energy, or currencies, or both.
Stocks and bonds have performed so well (mostly) for the last 30-35 years because we’ve experienced disinflationary growth (modest real growth with declining inflation and interest rates). Today? There’s little chance that disinflationary growth will continue (if anything, it’s more likely that the tailwinds of disinflationary growth will become headwinds). And our starting point is poor because valuations are so high.
The antidote? Genuine diversification. Meaning – we can own some U.S. stocks, but we should own a lot of other things too: like stocks outside the U.S., hard assets, real assets, and even some cash. Sometimes we find the “other things” in private markets or private deals; sometimes they are available at better prices in public markets. The point is not to be dependent on mainstream U.S. stocks and bonds.
When our business owner clients come to us for input on how to organize their net worth outside their business, this is our simple message today: don’t fall into the trap of assuming the future will be like the past. Dare to be a little different. Diversify.
Sarah Ketterer, co-founder & CEO, Causeway Capital – as quoted in Value Investor Insight, June 28, 2024
Cove Street Capital, CSC Strategy Letter Number 55, June 2024
The views expressed represent the opinions of Bluestone Financial Advisors as of the date noted and are subject to change. These views are not intended as a forecast, a guarantee of future results, investment recommendation, or an offer to buy or sell any securities. The information provided is of a general nature and should not be construed as investment advice or to provide any investment, tax, financial or legal advice or service to any person. The information contained has been compiled from sources deemed reliable, yet accuracy is not guaranteed.
Diversification and asset allocation do not ensure a profit or guarantee against loss.
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