U.S. Stocks Rally? Think Twice About Overexposure to U.S. Markets

U.S.-based investors should avoid overexposure to their home market, warns the North America head of one of the world’s largest independent financial advisory organisations.

The warning from Benjamin Alderson, Senior Area Manager of deVere USA, part of deVere Group, comes as the S&P 500 reached record intraday and closing highs this week.

Mr Alderson says: “The U.S. benchmark index has hit record highs largely due to a robust jobs report and European stocks rallying as a clear successor to David Cameron as British Prime Minister emerged.

However, despite this positive news-fuelled uptick, I would urge U.S. investors to avoid home bias, whereby they favor those markets with which they are most familiar.  Indeed, they should think twice about overexposure to their home market.”

He continues: “There are three interconnecting reasons for this.

First, a near-term worry is that U.S. stocks appear expensive, based on their current valuations, relative to their history and a shrinking of profit margins across many sectors.

This may be justified in the current monetary environment but the Fed has made it absolutely clear that it is seeking to normalize interest rates as soon as it can.

And if we don’t get the rate hikes, it will be indicative of a weak domestic and global economy – an environment that hardly justifies current valuations.”

He goes on to say: “The second factor is the risk of a President Trump‎. Like populist politicians around Europe, his message is anti-globalization, anti-immigration and appealing to those groups who want to ‘take back control’ of their country.

Some might argue that rolling back the globalization of the last 40 years is profoundly anti-growth. ‎The higher cost to the American consumer of buying ‘made in the USA’ manufactured products, compared to those that are currently made in Asia, could result in lower standards of living for Americans as well as a recession in China with a knock-on effect on demand for the high value exports that the U.S. sells to China.”

He adds: “And third, the low labor participation rate in U.S. unemployment may be low, but the number of people in work as a percentage of the total population of working age is also low, compared to the UK and other developed economies. This reflects structural problems in the U.S. labor market.”

Mr Alderson concludes: “Despite, or perhaps even because, of the U.S. markets’ rally, U.S.-based investors need to ensure that their portfolios are adequately diversified – and this includes across geographical regions, as well as assets and sectors.

The myth that international investing presents a higher risk must be busted. In fact, the more diversified the investment portfolio, encompassing a global reach, the greater the reduction of risk.

History teaches us that investors who maintain a well-diversified portfolio are best-placed to make the most of opportunities that present themselves, whilst simultaneously mitigating risk.”

Author: Dylan Jones

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