We pulled our rental car into my mother-in-law’s driveway. It was 11:30pm. I still remember the lights casting their beams across the neighbor’s grass. The sign on the edge of the lawn read, “Trump, Pence: Make America Great Again!”
Two weeks later, Trump shocked the world when he won the presidential election. U.S. stocks soon began the “Trump market rally.” From the date of the election (November 8, 2016) to June 6th, 2017, the S&P 500 gained 15.62 percent.
The stock market isn’t a wild animal that moves on the whims of its desire. Nor is it pushed or pulled by a president’s promise. Instead, we move stocks. I move them. You move them. Institutional traders move them. As with any kind of investment (stocks, bonds, houses) when there’s more buying than selling, prices rise. When there’s more selling than buying, prices fall.
The stock market is much like a dog on a leash.
Imagine two women walking their dogs. The women’s names are Angela and Denise. They are each covering 1000 miles (they come from really tough stock). Their dogs are from the same time-tested litter of champion canines. One dog is named America. The other is called International. Each dog is on a really long leash. Sometimes Angela walks a bit faster than Denise. Other times, Denise walks faster. But their average speed, overall, barely differs.
Their dogs, however, are far less predictable. Sometimes they run ahead of their masters. Other times they hang back (sometimes for ages) to sniff another dog’s turd. Denise walks America. But the dog has been pulling hard, sometimes choking on its breath. Meanwhile, Angela’s dog, International, has been loitering far behind.
Denise represents American business earnings. Her dog represents the U.S. stock market. Developed world stocks and business earnings always stay connected. Stocks might outpace business earnings for one year or ten. But ultimately, the dog can’t outpace its walker. It eventually falls back to realign with the owner’s pace.
Angela represents international business earnings. She marches forward. But her much-rested dog was sniffing trees and turds behind. It, too, has to keep pace with business earnings. When we least expect it, that dog is going to surge.
I’m not saying international stocks will beat U.S. stocks this year.
But if a dog lags for ages, it’s eventually going to sprint. That’s why international stocks are (so far) trouncing U.S. stocks this year. Say what you want about the Donald Trump rally. Since the election, international stocks are more than keeping pace.
Vanguard’s Total U.S. Stock Market Index (VTSMX) has gained 8.85 percent this year to June 6, 2017. Meanwhile, international stocks are really starting to hum. Vanguard’s International Stock Market Index is up 15.21 percent. Vanguard’s emerging market stock market index is up 14.70 percent.