Saturday, May 17, 2008

Long Term Trends

I've been writing a lot recently about long term trends. Investors always want to pinpoint changes in a trend because if you get it right, the rewards can be ample. Unfortunately, detecting a change in a long term trend is difficult at best. I reviewed the trend in style in this recent post. Today I will review the trend in International shares versus US shares. The EAFE has outperformed the US market over the longer term:

5 Years

3 Years

1 Year

Over the very short term, the US market has performed marginally better:

2 Months

I have heard a number of commentators recently proclaim that this means the trend is ending. I suppose that is possible, but it will take more than two months to convince me. The US economy may not be in recession, but growth is anemic at best. Countries outside the US are growing faster and many have better fiscal positions (even some so called emerging economies actually have better government finance than the US; does that mean they've emerged?).

Another trend that persists is the outperformance of emerging market stocks.

5 Years: EAFE, S&P 500, Emerging Markets

I see no evidence that this is coming to an end either. One word of caution though; everyone seems to agree that this trend will persist. When everyone agrees on something, I tend to get nervous. I suspect that when a correction in this trend arrives, it will pretty ugly so if you own these markets, you should keep your finger on the trigger.

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