December 30th, 2005

U.S. vs. Foreign Stocks: Oil and Gold Stocks

Since 2002, the U.S. stock market has underperformed nearly every other market in the world as measured by their respective Morgan Stanley ETF’s. This performance is even more discouraging when you take into consideration the fact that the significant improvement in the value of the $US against most foreign currencies over the past year:

Index/ETF 2005 2004 2003 3 YR
US S&P 500 3.00 8.99 26.38 42.58
Brazil EWZ 50.04 30.82 113.03 318.80
Austria EWO 19.85 72.43 55.05 219.74
Mexico EWW 41.93 47.31 37.19 188.03
S. Korea EWY 52.99 16.81 36.46 144.41
Sweden EWD 8.30 34.36 63.35 137.70
Canada EWC 26.66 21.33 50.95 132.84
Germany EWG 9.02 15.07 64.53 108.03
Australia EWA 16.69 24.96 47.09 107.49
Spain EWP 2.46 27.90 55.84 104.86
Japan EWJ 23.81 13.28 38.71 95.68
Belgium EWK 7.92 43.32 31.15 95.64
Singapore EWS 10.18 19.50 40.52 84.31
France EWQ 8.79 17.12 37.77 77.30
Italy EWI -0.08 29.82 35.07 76.71
Switzerland EWL 12.27 16.69 32.67 73.81
Hong Kong EWH 7.31 20.86 34.58 71.74
Taiwan EWT 3.48 7.30 37.91 53.13
U.K. EWU 2.71 16.11 28.23 52.92

No wonder I’ve been feeling so frustrated and blue! Had I invested anywhere in the world other than in U.S. stocks over the past 3 years I would have beaten my S&P benchmark by anywhere from 25% to nearly seven-fold (had I been 100% invested in Brazil, specifically).

Many talking heads have only just recently jumped on the foreign express train. I haven’t been totally innocent since I recommended the purchase of both Japanese stocks and gold/silver stocks here on October 11, nearly 3 months ago. But where were they in 2003 or 2004?

Notice, however, that as many of these markets have become more expensive, the annual increases have continually gotten smaller. (Again another truth – the largest percentage gains are those at the beginning of bull markets, whether for individual stocks of the market as a whole.) One need not be super intelligent, only a pessimist (or a realist), to see that increases in the S&P 500 have also been smaller each year indicating that the US, along with the other economies, may perhaps be heading towards a world-wide economic slow-down and, consequently, real declines in world stock markets.

But there may be an upside in all this. If you believe that everything ultimately “converges to the mean”, then next year might actually see the beginning of a bull market in US stocks as as they begin catching up with foreign stocks that either show little growth or even declines.

And which groups look, to me, to be the safest entering the new year. Stocks in the various Oil & Gas industry groups, after huge gains since the end of 2003, look like they may be close to completing a consolidation that began last summer. Likewise, the momentum that began towards the end of last year in gold and silver stocks doesn’t seem to be abating. The next leg up in both these areas may be triggered by any of the usual villain suspects (e.g., weather, international geopolitical events). But, you can be sure that we’ll only hear the explantions from the talking heads after the fact and the reasons won’t be pretty.

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