Not the Year of the Dollar

A new year brings a fresh opportunity to reflect on the year that’s past.  For U.S.-dollar investors who allocated funds abroad last year, it’s a happy reflection.  Take a look at the graphic below, which shows the U.S.-dollar returns of the top ten GDP contributors of the world.  China posted staggering results, up 54%, with India a distant second at 39% (still incredible!).  The U.S. market was next to last.  Only our friends up north underperformed, and that’s largely an energy story.

2017 USD Country Return Quilt

This marks the first time since 2009 that the U.S. has been in the bottom half and it’s the worst relative performance since 2007.  Dollar weakness was one of the main drivers, as the trade-weighted dollar fell 8.6% in 2017.  If we take out the impact of the dollar and look only at local market returns, the U.S. ranked fourth.

2017 Country Return Quilt

So what’s to come in 2018?  Will U.S.-based investors benefit again from their international exposure?  I believe the answer is yes, but it will come from outperformance in local stock markets rather than being dollar led.  U.S. valuations are getting extreme and the Fed is diverging from the global central bank trend by both raising rates and removing liquidity.  While the U.S. economy may outpace its international counterparts, increased growth raises the possibility of inflation, which could spell trouble for equities.  While my crystal ball is far from perfect, I’d expect to see the U.S. in the bottom half of both graphics this time next year.

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