Navigating the Next Decade: Investing Beyond the US Bull Run
Exploring strategies for long-term investors in a world of high valuations and uncertain returns
As keen readers know, I have both marveled at the S&P 500 growth story and expressed concern about the continued dominance of US stocks in world markets. While it’s relatively easy to voice concern, it’s far more important to understand the alternatives and evaluate our options accordingly.
First, let’s acknowledge that trying to predict where markets will go in the short term is a fool’s errand. I’m not worried about where the market will be tomorrow, next month, or even next quarter. My concerns are far more long-term. If we look 10 years ahead and work backward, are we expecting more of the same, or something fundamentally different? This is obviously harder than predicting tomorrow’s movement, but as long-term investors:
(a) our horizon is long, and
(b) regardless of how complicated the future might seem, we still have to make investment decisions today. A stake must be put into the ground somewhere.
If we assume that the bull run in US stock markets will continue, the natural course of action is to invest in the S&P 500. It’s a broad representation of the best-capitalized companies in the US, with better diversification and lower volatility than, say, the NASDAQ 100.
If, however, we operate on the premise that we don’t know where the world is heading—and we’re skeptical about markets identifying and adjusting market-cap weights correctly as potential shifts occur (as they have in favor of NVDA over the past two years)—then the logical choice is to buy a World tracker. Casting a wider net, it will automatically adjust as market caps evolve. Wherever investors allocate their money, the index adjusts, fueling demand for those stocks. Classic ETF/index-fund-driven momentum.
But if we believe that US markets may not offer the best forward returns from here, then either of the above strategies falls flat. Some commentators argue that at current valuations, long-term US stock returns could be underwhelming. For example, take this graph from JP Morgan1:
Every historical instance at similar valuation levels has led to extremely poor 10-year forward returns.
Let’s piece the premises together:
We are long-term investors, aiming to allocate capital for at least 10 years.
The US markets, as represented by the S&P 500, have had a phenomenal 12-year run but may deliver lackluster returns over the next decade at current valuations.
US markets today represent roughly 68% of global market-cap-weighted ETFs/index funds. This makes global funds less appealing for those seeking to allocate contrarian capital.
This leaves us with the following choices:
Move to cash, bonds, or gold, waiting for a potential correction in US markets to make valuations—and subsequent forward returns—more attractive.
Identify and invest in safe, individual US stocks that aren’t current market darlings but have the balance sheet strength and earnings capacity to perform well over the next decade.
Go international by actively selecting ETFs or indexes that focus on markets outside the US.
For my part, I am assuming the premises above hold true and plan to deploy a mix of these strategies as my general approach going forward.
More to come on the specifics in future posts.
Happy investing!
While the original is from JP Morgan, my attention to this graph was drawn from the latest Howard Marks memo.