Is It Time to Diversify Away from the US?

Pessimism may be slowly creeping into the stock market. CNBC reported on Tuesday that two-thirds of Chief Financial Officers (CFOs) responding to the most recent Duke University Global Business Outlook survey see a recession hitting the US economy by the end of 2020. Factors likely contributing to this view are the ongoing, and potentially growing, a trade war with China and expectations that the US Federal Reserve Bank is on the cusp of slashing short-term interest rates to prop up the economy.

If the smart money is getting ready for a financial storm in 2020, is now the time to diversify away from the US? -- this is a difficult question. First, because “timing the market” is extremely challenging and is usually a guaranteed way for investors to miss out on potential returns or even lose money. Secondly, there does not seem to be many attractive alternatives outside the US now. For example, the SPDR S&P 500 ETF (AMEX: SPY) is up 47.48% in the last 5-years, and the SPDR Dow Jones Industrial Average ETF (AMEX: DIA) is up 54.36% in the same period, according to data from Finscreener.com. The impressive performance contrasts sharply with one of the most widely held foreign developed market ETFs, the iShares MSCI EAFE ETF (AMEX: EFA), which is down 6.82% over the last 5-years.

Other foreign-focused investments are not performing much better. Examples include the iShares MSCI Emerging Markets ETF (AMEX: EEM), which is a China and Tech focused ETF that is down 4.48% over the last 5-years. Alternatively, the iShares MSCI Pacific ex-Japan ETF (AMEX: EPP), which is weighted toward Australian banks, is down 6.95% over the last 5-years. Looking at these funds over a medium-term 5-year investment horizon provides a better view of their average expected performance.

Bottom Line

The adage that “when the US sneezes the world catches a cold” may be worth heeding, but it is difficult to know where to hide. Many experts believe this bull market is long overdue for a correction and seem to have 2020 picked as “this time for sure.” The problem is that the rest of the world has not been performing very well compared to the US, and investors need to consider carefully if now is the right time to move money out of US investments.

Disclaimer: The writer is an experienced financial consultant who writes for Finscreener.org. The observations he makes are his own and are not intended as investment or trading advice.