America’s Truman Show

Forstrong Global’s Super Trends and Tactical Views

Truman Burbank is the unwitting star of Peter Wier’s end-of-millennium movie masterpiece. Ever since birth, his life on The Truman Show has been broadcast live around the clock and across the globe. A seemingly idyllic world on the island of Seahaven is really a massive, dome-encased studio equipped with 5,000 cameras to monitor all aspects of his life. Unknowing to Truman, everyone in his impossibly sundrenched, pastel-dappled town is an actor. Investors with U.S.-dominated portfolios over the last decade may have begun to feel like Truman.

Life has been near perfect for investors. An almost uninterrupted stock market swing. Unstoppable technology titans complete with a catchy acronym. The world’s most chronically strong currency. And booming corporate profits underpinning the entire show.

Looking back, it has been a long – and many would say well-earned – period of outperformance for U.S. assets. Since 2009, America’s stocks and its currency have trounced their global counterparts. By late last year, the US dollar index had surged to a 15-year high as investors bet that Trump’s eye-watering fiscal expansion and tax cuts would prove a replay of early 1980s Reaganomics. And even though the U.S. share of global GDP declined from 32% in 2001 to only 23% recently, its share values nevertheless now commands 61.7% of the MSCI World market capitalization (as of the end of 2018).

Lengthy bull markets have a habit of lulling investors into a kind of fake reality. When stocks are soaring, why question your charmed existence? Of course, it takes a willing cast to create a blissful reality…not least the local central bank. Here, investors must beware: Asset values may appear more attractive than they really are.

But financial markets are not reality TV. No director is there to ensure coordinated action. Nor are trends always synchronized. And, sometimes audiences simply lose interest.

The undoing of that near perfect American world began in late 2018, when U.S. stock market leadership turned down. What should investors make of this? In recent commentaries, we have argued that U.S. equities and the U.S. dollar are set to underperform. Why? Several key drivers of U.S. equity outperformance are going into reverse:

1. Fighting the worst financial crisis since the Great Depression, the Fed was the most aggressive liquidity provider in the world, leading the world in unconventional monetary policy (QE, TARP, etc.). They became a leading indicator of what other central banks would do. This is no longer the case. The Fed has been tightening, while almost everyone else is on hold.

2. In recent years the U.S. benefitted from an extraordinarily competitive currency. This is no longer the case. The U.S. dollar has gone from being significantly undervalued against almost all currencies to being overvalued against the likes of the euro, the yen, and a wide basket of emerging market currencies.

3. In recent years U.S. equities were attractively priced. This is no longer the case. They are now priced for perfection and the most expensive market in the world.

4. Expectations for U.S. assets climbed steadily over the last decade. By late last year, expectations for corporate profits hit an all-time high. This is a dangerous setup with much room for negative surprises.

5. Finally, America’s waning global leadership has diminished the attractiveness of its country as a destination for foreign capital. Trump’s infidelity to the post-war system and his Kanye-esque rants from the Twitter pulpit (totaling 2,860 tweets last year) took a proverbial wrecking ball to long-standing alliances. And “America first” policies (i.e., imposing tariffs, threatening to tear up trade agreements, and other unilateral actions) have been clearly counterproductive. Few friends have been made. Even Larry Kudlow, Trump’s director of the National Economic Council, recently identified the counterproductive nature of recent tariff action, referring to them wryly as “sanctions on our own country.” In a globalized world defined by a move toward closer interconnectedness, the “biggest loser” can only be the U.S.

Investment implications

Like Truman’s implanted fear of water (staged by the director so he stays on the island of Seahaven), investors can also become inflicted with a sort of aquaphobia. It’s terrifying to venture out when local assets are far outperforming the world.

Even the pros have stayed close to shore. Regularly, our investment team peers into the BAML Global Fund Manager Survey, a kind of investor voyeurism, giving us statistical snapshots of our competitor’s positioning. By far, U.S. equities are still the favored asset class (and have been for some time). But with a changing investment scene, that positioning will be disappointing. Like Truman, investors have nothing to fear by voyaging out beyond America’s borders.

Tyler Mordy, CFA, is President and CIO for Forstrong Global Asset Management Inc., engaged in top-down strategy, investment policy, and securities selection. He specializes in global investment strategy and ETF trends. This article first appeared in Forstrong’s publication Super Trends and Tactical Views, available on the Global Thinking blog. Used with permission. You can reach Tyler by phone at Forstrong Global, toll-free 1-888-419-6715, or by email at tmordy@forstrong.com. Follow Tyler on Twitter at @TylerMordy and @ForstrongGlobal.

Notes and Disclaimers

The foregoing is for general information purposes only and is the opinion of the writer. The author and clients of Forstrong Global Asset Management may have positions in securities mentioned. Commissions and management fees may be associated with exchange-traded funds. Please read the prospectus before investing. Securities mentioned carry risk of loss, and no guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.