Monday, August 31
Naturally as a host nation, the U.S. had a lot of support at the World Cup. As a global economic powerhouse, investors also strongly support American equities.
But it’s risky if your retirement portfolio is only screaming, “U-S-A! U-S-A!”
And it seems like that’s a lot of people. They may own an S&P 500 fund and think they’re diversified. But if you only invest in the U.S., it’s a huge risk.
As of this writing, the Shiller Cyclically Adjusted Price-to-Earnings (CAPE) Ratio for the S&P 500 sits above 40. The long run average is 18.
American stocks have only been this overvalued twice before in the last 100 years – 1929 and 2000 – and neither of those times worked out well for most investors.
A past study showed when CAPE Ratios eclipsed 40:
- The U.S. in the 1990s
- Japan in the 1980s
- China in 2007
- India in 2007
In every case, the subsequent 10-year real returns averaged 0%. Not once did a country reach a CAPE Ratio above 40 and then deliver even an average decade.
When markets go to extremes, they get concentrated. America’s market is concentrated into just a handful of names – the 10 largest companies in the S&P 500 (mostly in the technology sector) now account for roughly 40% of the entire index.
This is worse than the dot-com era peak and stands at the highest level in five decades. Put another way, $0.40 of every dollar buying the S&P 500 now is buying 10 stocks.
It’s a concentrated bet on a trend that’s shifted from equity financing to debt financing. That makes the risk even bigger.
In this setup, a single country’s debt can wipe out a generation of investor wealth. And yet, homers still invest only in America.
Daniel A. White is an investment advisory representative of and provides advisory services through CoreCap Advisors, LLC. Daniel A. White & Associates and CoreCap Advisors are separate and unaffiliated entities.