U.S. Stocks Beating World With Lower VolatilityAlex Barinka
U.S. stocks are delivering the best risk-adjusted returns among the world’s biggest developed markets as a third straight year of earnings growth produces steadier gains.
The Standard & Poor’s 500 Index has risen 1.9 percent in 2013 when adjusted for price swings, the top advance among 24 of the largest developed nations, according to the BLOOMBERG RISKLESS RETURN RANKING. The performance exceeds Japan, where prices have surged almost twice as much this year, as a measure of U.S. volatility reached a six-year low.
The benchmark for American equities has provided more stable returns as China’s economy expands at the slowest pace in at least two decades and Europe faces record joblessness, prompting investors to seek safety in U.S. companies. The Federal Reserve’s unprecedented bond purchases and five years of S&P 500 profit growth have helped rebuild investor confidence after the financial crisis and reduce price swings.
"The U.S. continues to be the most resilient economy across the world and its markets have reflected that with the least amount of volatility," Joseph Tanious, global market strategist for J.P. Morgan Asset Management, said in a phone interview from New York. His firm oversees about $1.5 trillion. "Earnings growth has continued to hit record highs. There is less skepticism about the long-term potential in U.S. markets."
The risk-adjusted return is calculated by dividing total return by volatility, or the degree of daily price variation. The measure, which isn’t annualized, is designed to show performance per unit of risk. Higher volatility means the price of an asset can swing dramatically in a short period, increasing the potential for unexpected losses.
The consistency of the American economic growth has reduced volatility in U.S. shares to the fifth-lowest level among 24 benchmark indexes of developed nations, according to data compiled by Bloomberg. The Chicago Board Options Exchange Volatility Index, tracking options on the S&P 500, is down 22 percent this year after touching a six-year low in March.
The U.S. has added jobs every month since September 2010 during the recovery from the worst financial crisis since the Great Depression, according to data compiled by Bloomberg. Gains in home prices and stock values have boosted household wealth, giving some consumers the confidence to borrow for big-ticket purchases such as automobiles.
The S&P 500 rose 1.3 percent last week, touching a record, as the Federal Open Market Committee said at its Sept. 17-18 meeting that it will continue to buy $85 billion of assets a month, surprising economists who had forecast a reduction. Fed Bank of St. Louis President James Bullard said last week that policy makers may decide to reduce their monthly bond purchases at the meeting in October.
"Tapering of asset purchases should not pose a significant risk for equities," Adam Parker, chief U.S. equity strategist at Morgan Stanley, said in Sept. 23 research report. "Good news on the economy is good for markets."
Speculation about whether Japan’s central bank stimulus and economic reforms will be enough to boost growth has generated average daily price swings in the Topix of 1.3 percent, compared with 0.6 percent for the S&P 500, according to data compiled by Bloomberg.
"One reason why the US has done very well is the stabilization of the economy," Sean Lynch, global investment strategist for Wells Fargo Private Bank, said by phone from Omaha, Nebraska. His firm oversees $170 billion. "We are struggling with trying to keep our clients globally invested because they see the returns in the S&P and they just want to be invested in that."
The S&P 500 has gained 19 percent this year and reached an all-time high on Sept. 18. Earnings for S&P 500 companies are projected to grow 5.2 percent this year, compared with a quarterly average of 20 percent since 2010, analysts’ estimates tracked by Bloomberg show.
About $96.7 billion went into U.S. equity-exchange traded funds in 2013, almost twice the amount at this time last year, according to data compiled by Bloomberg. ETFs are baskets of equities and other assets that trade on exchanges throughout the day like stocks.
The U.S. "adjusted more quickly after the financial crisis and growth came through more strongly," Alex Tedder, senior vice president, who helps manage about $18 billion in global stocks at American Century Investments in New York, said in a phone interview. "In Japan, you have had the huge stimulus at the beginning part of the year. Europe has been back and forth and is still trying to recover from the whole crisis."
The Topix, which tracks 1,749 companies, has soared 41 percent in 2013 as the government introduced policies to end 15 years of deflation and the central bank promised to double the amount of currency in circulation. After adjusting for price swings, the index is up 1.6 percent this year, according to data compiled by Bloomberg.
The U.K.’s FTSE 100 Index returned 1.2 percent in 2013 after accounting for volatility, Germany’s DAX rose 0.9 percent and the Hang Seng Index of Hong Kong gained 0.4 percent.
Investors should be more optimistic about Japan because the shares are rallying, company valuations are attractive and Abe’s policies have been in place for almost a year, according to Ned Gray, who manages $1.2 billion as chief investment officer for global and international value equity at Delaware Investment Co.
"I would expect volatility to decline," he said in a phone interview from Boston.
Health-care companies have provided the best risk-adjusted returns among 10 industries in the S&P 500 with a 2.4 percent advance this year, data compiled by Bloomberg show. The industry’s shares have climbed 27 percent in 2013, led by Boston Scientific Corp. and Celgene Corp.
Best Buy Co., the world’s largest consumer-electronics retailer, has climbed 5 percent on a risk-adjusted basis this year for the top return among S&P 500 companies. In August, the Richfield, Minnesota-based company posted the biggest quarterly profit in more than two years after trimming costs and cutting prices to spur sales. The shares are up 223 percent in 2013.
The U.S. "has the most dynamic corporate sector and the deepest stock market," American Century’s Tedder said. "The result of that is that the U.S. leads the rest of the world."
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