Stocktake: Will US outperformance ever end?

The recent underperformance of European stocks raises the question: will US outperformance ever end?

That question was raised last week by market strategist Jeroen Blokland, a question prompted by a JPMorgan chart showing US stocks have now outperformed for 13.6 years.

That’s an incredible, unprecedented run. Over the last five decades, periods of US outperformance were reliably followed by periods of underperformance. The non-US world outperformed for 6.1 years in the late 1980s; the US led the way for 6.2 years during the 1990s dotcom bubble; non-US stocks then took the baton for 7.3 years, before the current cycle got under way.

Blokland answers his own question: yes, the current record-breaking run will end, but it’s likely we will see shorter periods of ex-US outperformance followed by shorter periods of US outperformance, as was the case for much of the 1970s and 1980s.

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Lower valuations and a bigger weighting of cyclical stocks mean non-US stocks should lead during periods of economic recovery, like we see now. However, as such periods are increasingly driven by fiscal and monetary stimulus, periods of outperformance are more likely to be cyclical than secular.

In contrast, US technology stocks profit from important secular trends. As technology becomes more important in everyday life, investors will likely rotate back into the US when they begin to doubt economic strength or expect lower rates.

Of course, timing such turns is a treacherous business. If you get it right, you profit handsomely; get it wrong, and your pension fund stagnates.

One solution: just pick a world index fund, diversifying as globally as possible.