Why viewing the US as a safe haven could cost you (Part 5 of 5)
Since 2010, stock market risk – measured using the volatility of daily returns – was roughly equal in and outside the United States. Recently, that has changed. Over the past five weeks, the volatility of the U.S. market (IVV) has been higher than the volatility of markets outside the United States.
It is getting difficult to argue that the United States is still the “safe port” in a storm. Given the changing dynamic, we continue to believe that this is a good time for investors to consider lowering their overweight position in U.S. equities while raising the allocation to international stocks.
Market Realist – The graph above compares the 30-day volatility (VXX) for the S&P 500 (SPY)(IVV) and that for the rest of the world using the MSCI ACWI ex-U.S. (ACWX) as a proxy since October 2009, which stands at 15.4% and 15.3%, respectively. Although the gulf between the two may not seem much, the five-year averages tell a different story.
The five-year average of the 30-day volatility for S&P 500 stands at 14.9%, compared to 19.1% for the rest of the world (QWLD). The current volatility of the U.S. index is higher than its five-year average, whereas the volatility of the rest of the world is much lower than its five-year average. This means that the volatility of the latter is much lower than usual. This makes the rest of the world a safer bet than U.S. stocks—especially emerging markets (EEM), which offer the added advantage of faster growth.
Please read Market Realist’s Why US investors should look abroad for equity opportunities to learn more.
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