In early January I wrote When the Trend Ends because I felt like investor sentiment was getting out of control and the world was turning into degenerate gamblers. I sensed that far too many thought that US stocks, especially the Magnificent 7, were exceptional and that Crypto only goes up.
It is amazing what a few months can do to change the narrative. Below is a chart that shows three etfs: SPY (US stocks in red), EWZ (Brazil blue), and FXI (China in green) year to date. It may feel like a recession in the US this year, but many foreign stock markets are soaring.
In late 2020 I started using a Dual Momentum Strategy to help me determine whether to overweight U.S. or Foreign stocks for most of the models that we use for IRAs. You can read that blog here. The model is rules based and doesn’t rely on me trying to predict where markets are headed. Since 2010, this model has been heavily favoring U.S. stocks and that has been the right place to be. Below you can see how well SPY (US stocks in red) have performed against SPDW (Europe/Japan/Canada/Australia in blue) and (Emerging Markets in green).
This massive out-performance has led to massive gaps between the valuations in these countries’ stock markets compared to the U.S. In my view the rubber band has stretched too far. It is very likely that my momentum model is going to switch to 80% Foreign stocks and 20% U.S. stocks in the beginning of April. I sincerely hope that this is big momentum switch where we over-weight Foreign stocks for 5 to 10 years. If it is not the time, I will continue to follow the model and go back to over-weighting U.S. stocks.
When a 15 year trend changes, it is usually really hard to see it while it changes. Humans extrapolate the recent history and expect that trend to keep going. I can’t tell you what could cause U.S. stocks to perform relatively poorly. Some people think the only way that America can manufacture again is to crash the dollar. Here is a video of mutual fund manager, Ron Barron, saying the new administration is purposely slowing down the economy to get inflation under control.
Here is Harris Kupperman, hedge fund manager, explaining why he likes DOGE’s policies for the longer term, but thinks it is bad for the short-term. He also discusses why he thinks foreign stocks beat US stocks.
IF this is a major inflection, it is not clear to me what flipped. A few years from now, we can all point to A, B, and C as the start of the great transition. At this point, we are just guessing. Instead of speculation, I will trust the dual momentum tool to guide the ship.
What if the Mag 7 stocks turn into the Bag 7? What if Microsoft hit a long term peak on 7/5/24?
What if Apple topped on 12/26/24?
What if Nvidia peaked 1/6/25?
What if Google topped 2/4/25?
What if Meta hit a long term peak on 2/4/25?
What if it takes year for Tesla to get back to its 12/17/24 top? It is down almost 50% in three months.
What if 2/12/25 was a long term top for Amazon?
What if the last growing U.S. Shale basin is in decline?