“Everyone has the brain power to make money in stocks. Not everyone has the stomach,” once observed legendary fund manager Peter Lynch. His point was that most people don’t have the stomach – or emotional stamina – for sticking to an investment plan when market conditions get choppy.
What makes 2018 remarkably different from the recent past is rising stock market volatility.
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The total U.S. stock market has gained over 20% during the past year and is doing great. But for U.S. investors that are under-weighted to foreign stocks, it’s not so great. Why? Because foreign stocks have convincingly outperformed U.S. equities, thereby causing a performance deficit. What’s the problem?
The tendency of investors to concentrate and tilt their stock and bond holdings toward their home country is referred to as “home-bias investing.”
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Selling pressure in the euro has been relentless over the past year and the currency has fallen just over 19% in value. Without surprise, pessimism toward the euro has been building.
Look at these recent mainstream headlines:
Delight or Dread as Euro Falls – New York Times (Mar.
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Have market participants underestimated the possibility of a divorce between Greece and the euro?
The chart below illustrates the market implied probabilities of a Greek default along with an exit from the euro (“GREXIT”) since late 2009. As you can see, up until early 2013, both scenarios moved in virtual lockstep with each other.
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How did market participants react to the ECB’s 1.1 trillion euro QE-styled asset purchase plan? By pouring money into European stocks.
Europe focused stock ETFs (NYSEARCA:VGK) collectively raked in 65% of all global ETP asset flow last week, gaining just over $4 billion in new assets.
(Audio) Listen to Ron DeLegge @ The Index Investing Show
Despite reluctance by Germany (NYSEARCA:EWG),
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