Last week, I outlined the case for fiscal dominance (see Will the Next Fed Chair Matter Much to Policy?). U.S. debt to GDP is rising and not stabilizing. In all likelihood, the Fed will follow the path of the BoJ of cutting short rates, restarting quantitative easing and yield curve control to suppress long rates, which would put upward pressure on inflation and downward pressure on the USD. For investors, the best hedge for inflation-adjusted returns will be equities — global equities.
One U.S. based reader asked for greater guidance to regional equity allocation. I replied that, that, when considering long-term investment policy, a passive allocation to global equities would be appropriate as it’s difficult to forecast the long-term outlook for different regional economies in the future.
I would now add that, as an active strategy, investors adopt a barbell allocation in the equity portion of their portfolio to U.S. large-cap growth and non-U.S. value stocks. The top panel of the accompanying chart shows that the U.S. and non-U.S. value and growth cycle tracked each other closely until early 2023 when they bifurcated. Growth outperformed in the U.S., while value began a steady multi-year uptrend.
My active strategy is based on the principle that “the trend is your friend”.
The bottom panel shows the relative performance of the two barbell portions of the allocation. U.S. growth is leading the MSCI All-Country World Index (ACWI) benchmark, mainly because U.S. equities have been on a tear against global equities since the GFC. Outside the U.S., EAFE value stocks have been flat against ACWI since mid-2020.
The bifurcate of growth and value relationship is additional evidence of American Exceptionalism in equity performance, which is mainly based on the promise of gains from artificial intelligence. For investors, the key question is how long AI will dominate American equity returns.
The full post can be found here.
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