Investors in the U.S. have reaped rich rewards so far in the 1990s. The bond market staged one of its strongest rallies ever, and the stock market powered its way to record highs.
Going forward, what kind of returns can investors in the U.S. bond and stock markets expect? These days, it seems that the answer for many Wall Street market mavens is "not much." The U.S. markets simply aren't attractive, they mutter. Dividend yields are too low, price-earnings ratios are too high, and interest rates are poised to rise. Instead, eye-popping returns lie abroad, in European bourses and emerging-country markets.
Perhaps. But we suspect that those who voice these worries about the U.S. markets underestimate the economic fundamentals. As the rest of the industrial world languishes, U.S. corporate profits are poised to rise by more than 10% next year. American companies have boosted their productivity in recent years by overhauling the workplace and investing in new technologies. In sharp contrast, Japanese and European companies have just begun a painful restructuring process.
What's more, fears of rising inflation and interest rates in the U.S. are overblown. With the drop in the price of oil, inflation in this coming year could possibly fall below 1993's 2.7% annual rate. That means fixed-income investors could enjoy decent inflation-adjusted returns even if long-term interest rates stay around current levels.
This is not to say that investors should follow an isolationist policy. Diversification is a hallmark of modern portfolio management. It clearly pays to spread investment funds across a wide range of markets to reduce overall risk. And the trend toward global financial-market integration means that investing abroad is easier and safer than ever before. For the U.S. investor, the increased opportunities abroad can only be a good thing. But they should not distract the canny investor from the powerful possibilities at home.