The US equity market has had a volatile year, but the higher risk has paid off… big time. In absolute and relative terms the numbers speak volumes. And the outperformance isn’t limited to recent history. Over a five-year trailing period, for example, the stock market in the US has left the rest of major asset classes in the dust.
Should investors be worried? Wrong question. A better way to frame current conditions: Anyone sitting on sizable gains driven by US equities, or overseeing a portfolio that’s heavily weighted in US stocks, should consider rebalancing. That’s not a forecast that stocks are about to crumble. For all I know they’ll run higher for longer than anyone expects. But for mere mortals focused on risk management vs. maximizing performance there’s a good case for thinking that a round of nipping and tucking on the asset allocation front is timely.
One input for that decision is the stellar performance in stocks vs. the rest of the field. Although a prudent rebalancing strategy shouldn’t rely on return alone, it’s hard to overlook the fact US equities have generated a stunning premium over the other major asset classes.
For some perspective, let’s stack up results for a set of exchange-traded products that represent the major asset classes:
Consider how Vanguard Total Stock Market (VTI), a broad-minded US equity fund, has performed over the last year vs. the rest of the field for the trailing one-year window. As the chart below reminds, US equities have been on a tear in recent months. A $100 investment a year ago in VTI is worth more than $122 as of yesterday’s close (August 29). The next best performer — Vanguard FTSE Developed Markets (VEA) – is currently worth a distant $106.
The runaway performance for US stocks is hardly a recent phenomenon. Over the past five years the return gap is even wider, as the next chart shows. A $100 investment in VTI five years ago surged to nearly $200 by yesterday’s close. By comparison, the same investment in the other major asset classes has delivered gains of less than $140 over that span, and in several cases a lot less.
