From Greece to Qatar: A Review of Markets in 2017

Every once in a while it’s helpful to check in on the markets; not as a way to predict the future but as a way to better understand what we all are investing in. After all, though we don’t have control over market returns throughout our life it still matters a great deal. With that in mind there are some interesting story lines through the first half of 2017 and I’d like to walk you through them with the proper perspective. The below numbers are through June 30, 2017.

The big story is that it has been an overwhelmingly positive year for stocks in general. The U.S. has had a good first half on its own, but the double digit return across various classes of International Stocks dwarfs domestic returns.

A couple of quick reminders:

  1. Small stocks are typically those with a market cap of less than $3 billion. Evidence shows they have higher expected returns over long periods of time. For reference, Apple, one of the largest companies in the world, has a market cap near $800 billion, so…..not small.
  2. Value stocks are determined by a stock’s relative book-to-market ratio; that is, the book (accounting) value of a company versus its market cap. The 25% of stocks with the lowest book-to-market ratio are classified value. Evidence shows these stocks have higher expected returns over time, but as you can see that relationship does not always hold up over shorter time periods.
  3. Emerging Markets stocks are companies located in countries that are not as developed internationally due to political instability, a lack of regulated markets, etc. The biggest of these markets are referred to as the BRIC countries—Brazil, Russia, India, and China.

Emerging markets have been the best performer year to date which isn’t surprising. Because of some of the risks mentioned above, you will often find emerging markets stocks as one of the best-performing asset classes in good years or as one of the worst-performing asset classes in bad years.

Interestingly enough, one of the large drivers of the outperformance of international stocks is the weakening of the dollar this year. The dollar had gained in relative strength for the past several years and has finally seen a reversal in that trend more recently. When you invest in international stocks through mutual funds, you are likely purchasing them in foreign currencies. Here are the currency returns for the second quarter:

The relative spread on these different countries over such a short period of time is a good reminder of the folly of predicting these sorts of things. And in case you want further proof, here’s the actual stock market returns of the different countries:

Greece, of all places, is blowing away the competition for the second quarter. Their return of 34% nearly doubled the three nearest competitors in Hungary, Turkey, and Austria. Greece’s issues have been well documented for the last eight years, but the other three had some pretty dramatic political events of their own (shifts towards authoritarianism, in fact). This is always a good reminder that markets are affected by thousands of risk factors and political risk is simply one of many. Because politics dominates the news one may assume it steers market behavior, but numerous studies show a weaker link than many other factors not on the front page of the newspaper.

Furthermore, these numbers (like nearly every quarter) continue to make a great case for global diversification. There is a literal world of opportunity in capital markets. By staying diversified, we get the benefits of U.S. outperformance when it happens (as for the last several years) and we reap the rewards of international outperformance when it happens (as in this year).

Remember that there’s nothing wrong with following and better understanding markets, but that this information will not help you outperform the market. The market is the engine that drives our long-term financial success as long as we leave it alone.