Global market indexes just completed a very strange and short trip, starting with a decline of nearly 20% in the first weeks of April, followed by a remarkable recovery to previous levels just last week! Though very rare behavior, and unsettling to say the least, we have seen this once before: in 1998 during the meltdown of the Long Term Capital hedge fund, coupled with the devaluation of the Russian ruble. In the aftermath of that violent market “round trip,” as is the case now, investors became overly pessimistic, selling stock in favor of the safety of large cash balances. In ‘98 this pessimism turned out to be an expensive mistake, as global market indexes catapulted higher during the following 18 months – generating some of the best returns of that decade!  

Lessons From 1998 and Today

We share the story of 1998 and its data as a reminder to all of us to avoid letting volatility sway our view of healthy underlying economic and profit fundamentals – which in 1998 was the case, and we would argue remains the case today. However, we did learn a few things from this recent and very strange round trip, most importantly that global markets are very sensitive to government economic policy, and not just that of the United States. As stocks declined and rebounded over the past three months, there has been a significant transfer of leadership between US and overseas stocks – the latter being the clear winner. Though US performance has been respectable since April, second place is unfamiliar territory for a market long hailed as the world’s “most exceptional.” Need we tell the tales of crowd psychology?! ‍

Global Economic Policies Favor Overseas Stocks

Over long periods of time, foreign and domestic stocks can take turns being “exceptional,” usually for many consecutive years. We recall well that from 2002-2008, foreign stock performance trounced that of our markets – mostly due to global government economic policies. As a global investor, that was a period we enjoyed. Today we would suggest something similar may be afoot. We base this possibly longer-term trend on the significant changes that are taking place in government policy. Namely, the objectives of the current US administration are to reduce government spending, rotate to a protectionist view of the world, and maintain a “tight” monetary policy. These policies add up to what we call restrictive monetary and fiscal policy, which together tend to slow economic growth and act as a headwind for corporate profits and stock prices. A slower than normal economic growth rate for the US still makes US stocks attractive – particularly certain sectors of the market which we will touch on. However, when we consider economies and markets outside of the US, we find it hard to imagine that US equity performance will be able keep pace. Our basis for this reasoning is that overseas administrations have borrowed a page from the 2010-25 US policy book and have begun a serious muti-year campaign of significant fiscal spending, coupled with accommodative monetary policy. Basically a “double barreled shotgun” of economic stimulus measures, which we know from our own example here in the US ignites economic growth, corporate profits, and rising stock prices. The market’s recent leadership change towards foreign equities is telling investors a story – “get your passport!” It is important to be globally diversified! Please click here to watch our Founder’s recent interview about this subject on Bloomberg TV.

Attractive Sectors in the US and Overseas

Slower growth in the US economy along with stronger growth overseas can support extended but different bull markets in each region. In terms of the US, we want to focus on companies that are at the heart of Artificial Intelligence, which entails embracing the technology and communications sectors. The administration’s focus on deregulation also favors financial stocks. If the US economy has growth headwinds, it is important to embrace companies with strong balance sheets, in sectors that can exhibit strong growth regardless – this includes healthcare and consumer staples. In terms of foreign equities, strong economic fundamentals are bullish for most sectors, but particularly for technology, communications, energy, industrial, and consumer discretionary companies. When we compare US to foreign equites – particularly to those in Europe – we find a very compelling valuation disparity. Specifically, foreign stocks are less expensive than US equities by a very wide margin. This is most likely due to investor’s neglecting these markets for many years – a trend we believe has begun to reverse for the foreseeable future. Lastly, the balance of institutional exposure to non-US equities is at its lowest level in decades. This metric is important as we consider the possibility of this exposure becoming more normalized – this could bring a significant force of buying power which would drive non-US equities higher. ‍

Your US versus Foreign Allocation

As you review your portfolio holdings, you will notice that you still maintain healthy exposure to US stocks in the areas we have touched upon above. However, you will also see an increased allocation to some of the best companies in the world that just happen to be located outside of the US. The recent market volatility was helpful for us to adjust your portfolio to this allocation, and we are optimistic as we head in to the “back half” of 2025. ‍

Risk Management

It’s a synchronized global bull market and we are grateful that we are a global manager with decades of experience in this area. As we consider our bullish case, we would be remiss to neglect potential risks to our optimistic view. There are many risks, which include a US credit downgrade, heightened conflicts in the Middle East or other regions, along with risks that are unknown. For this reason, we remain dedicated to our Active Risk Management process. This unique set of tools includes flexibility of your allocation to stocks, the ability to tilt toward defensive sectors, and the use of carefully placed stoploss orders. In the past this process has assisted us in mitigating the catastrophic losses most investors fall victim to in significant bear markets, and we are confident it may continue to protect you as well.

If you have any questions regarding your portfolio or have experienced a change in your financial affairs, please let us know.

We have recently been honored to receive many referrals from clients, which we appreciate and believe is one of the best gauges of client satisfaction. If you have thought of doing so, or needed a reminder of what makes it different here at Main Street Research, here is some content that might be helpful:

• We are a global advisor and employ individual securities, as opposed to other firms that focus solely on the US and mainly employs exchange traded (ETF) or mutual funds, which layer additional fees.
• Our Active Risk Management process mitigates downside risk – compared to other firms that simply “buy & hold.”
• We are one of the few firms that has a fee based on performance, which more closely aligns our fee with client results.
• Each of our client’s portfolios is managed separately, which allows us to personally tailor their holdings, as opposed to other firms that force clients into “model” portfolios.
• All of our investments have daily liquidity and can be turned into cash in short order, as opposed to other firms that invest in more illiquid assets.

We hope these reminders are helpful about the work we do for you, and though we have a minimum level to engage a new client, this does not apply to your family members.

Thank you again – from all of us – for your continued confidence in our work.

Your team at MSR

Watch

‍

Listen

‍

* performance fee is only for qualified investors

‍