Geopolitics and the market: what to expect

+ are international stocks a good play for 2020?

Issue #20. 

Happy New Year, and welcome to our issue #20! In this edition, we’ll discuss the impact of the Iran crisis on US stocks, the case for international stocks in 2020, and how to look for stock replacement candidates in your portfolio.

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You can also ask us any finance or investment question privately by visiting AskFinny.com.  We will share the most insightful questions and answers with our Gist audience.

So here are the questions for today’s edition: 

  1. Should I be worried about stock market performance in light of the political crisis between the US and Iran?

  2. Are international stocks a good play for 2020?

  3. I own Walgreens stock (WBA) in my portfolio—what stock should I replace it with if the company goes private?

Let’s give you the summary first.

Summary

  1. When events such as the US-Iran conflict affect stock markets, the question that investors should ask themselves is whether the deepening of the conflict would impact the fundamentals of the economy and markets, such as earnings, interest rates, and valuation. If the answer is yes, then we’re likely to see a correction in stock market performance.

  2. In the past 5-10 years, the performance of most international stock markets has trailed that of US stocks, so many analysts expect that developing and emerging markets will eventually ‘catch up’ with the US market over the next few years. This is formally known as mean reversion. Hence you may hear the argument that ex-US stocks a good place to double down on in 2020. If you’re looking to select specific funds or ETFs, check the international selection of top mutual funds and ETFs.

  3. If you’re looking to replace Walgreens (or any other stock) in your portfolio, you may want to search for stocks in the same industry (i.e., pharma retailers) that offer comparable exposure to that of Walgreens. Check out the Alternatives and Comparables tool to get specific suggestions for WBA replacement.

Deep Dive

  1. The US killing of Iran's most powerful general is striking fear into the geopolitical realm. Last Friday markets reacted accordingly as oil and gold prices went up, while the stock market fell and interest rates declined. It’s a well-known thing that investors hate uncertainty, and the threat of war certainly drives uncertainty up.

    However, uncertain situations don't always play out in stocks as many would assume. The relationship between geopolitical crises and market outcomes isn't as simple as it seems, and so much of it depends on the fundamentals of the economy and the markets.

    Let us give you an example. The September 11 terrorist attack in 2001 caused stocks to fall sharply, 15% in less than two weeks following the tragedy. The economy was already in the middle of a recession at that point, and stocks were in a free fall from the bursting of the dot-com bubble. But within a couple of months, the stock market had made back all of the losses that occurred in the aftermath of 9/11.

    What will happen this time around? It is too early to know how the conflict between the US and Iran will evolve, but it’s important for investors to keep an eye on developments that have the potential to affect the fundamentals: US or global earnings growth, interest rates, and Fed policy.

  2. US equity markets have outperformed the rest of the world’s markets for the past decade. However, this hasn’t been the case for longer time periods.

    Prior to recent history, international stocks had outperformed the S&P 500 for most multiyear periods. So analysts believe it's a matter of time before international stocks regain popularity.

    The P/E ratios of US stocks have remained above their long-term historical averages. Conversely, the P/E ratios of non-US stocks remained well below their respective long-term averages.

    We should not be surprised to see increased volatility in the US stock market, stemming from geopolitical tensions, 2020 elections and ongoing trade negotiations with China. From this vantage point, international stocks seem to be ready for a comeback.

  3. Often times our readers ask us, how do I re-balance my portfolio if I’ve fallen out of love with a specific stock, or if the company which shares I own goes private.

    While financial advisors can easily help you with such problems, you’re welcome to try using a tool for do-it-yourself investors that looks for similar stocks in the same industry. You can check out the Comparables and Alternatives tool here.

    The tool also works for ETFs and mutual funds. If you’re looking for alternatives to Vanguard’s Total Stock Market ETF, VTI, there are a few options—most notably, ITOT and SCHB.

That’s it for this edition.  As always, ask us anything on our site.

The AskFinny Team

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