In meetings with clients in Hawaii and on the road lately, I’ve heard many of the same, good questions. Here are the three most frequent.
What are your views of the new coronavirus emergency?
First, we profess no expertise on the Wuhan coronavirus (now called COVID-19) and won’t pretend to know for sure what happens next in the saga. We have been focusing on supply chain impacts, noticing some companies are harder hit than others. China is the prime manufacturer for many American companies (like Apple); the impact on these are easier to monitor. Harder for us are those companies that depend on a supplier that may depend on a supplier that only exists in China. We see the largest U.S. companies are outperforming, but this isn’t surprising given many of the largest companies are “Big Tech”—Google, Facebook, Amazon, Microsoft, etc.—that have little-to-no Chinese sales. The dollar has risen sharply with money seeking safe haven.
A distinct possibility is the COVID-19 scare soon moderates or subsides, perhaps because of successful containment or the end of flu season or people get used to the idea of another flu we will all have to manage. That could mean higher stocks, higher interest rates, and a reversal of dollar strength. We are starting to look hard at long-underperforming sectors and regions that could benefit in such an environment.
How expensive are stocks—Is it time to talk about a bubble?
It’s hard to claim stocks are cheap. Stocks trade at 21.5 times earnings; the average since 1950 is 16.0 times, according to Strategas Research Partners. However, stocks look a lot less expensive when you look at the alternatives, especially their prime alternative: bonds. With rock-bottom yields and even negative yields in Europe or Japan, stocks deserve a premium. So long as earnings grow and stocks continue to receive favorable tax treatment, we think stocks are a better deal on the margin. We are somewhat reluctant bulls.
The bubble may be in bonds, and certainly in global debt and monetary intervention by central banks. How much debt can we sustain with printed money before something breaks?
Why don’t you invest much internationally?
We get this question a lot, particularly from other advisors and even research database firms who focus too much on where a company is domiciled rather than where it actually does business. Some 40% of S&P 500 revenue is international, which means investing in U.S. stocks means you are participating in markets globally. Many of our holdings get over half of their business from abroad.
If anything, we have been global investors but concentrated in American management. And that’s worked out relatively well. Consider that over the last 10 years, U.S. stocks have had returns triple that of developed markets (like Europe and Japan) and five times better than emerging markets (which include China and India among many others). U.S. stocks have also outperformed over much longer periods of time.
With the benefit of hindsight, the U.S. has rather deserved to do relatively well. Think of the innovation created and companies built in the U.S. versus, say, Europe. Or the shareholder-friendliness and fiduciary nature of American management versus Japan or Korea. Or the stable currency and rule of law that affords a return on capital (the most important driver of real investment gains) that are hard to find in India, Russia, and Brazil. As an Indian-born advisor once remarked about the U.S. as we talked shop over lunch last year, “There’s just something in the water here.”
That said, everything has its time, and change is inevitable. There will be a time when we have more stocks based abroad, whether it’s because of better quality investments and innovation abroad or because of bargain-hunting and diversification (the premium investors pay for American companies versus foreign ones can’t rise indefinitely).
I suspect we will have more to say on this topic in the future.