If You Missed The U.S. Bull Market, Here’s Your Second Chance
For four years I was a derivatives trader for a billion-dollar trading firm in Chicago.
One important lesson I learned: pay attention to the biggest traders in the game.
Professional traders go to great lengths to hide everything they do. It’s no different than poker — you don’t want your opponent to know your hand.
But right now, one of the most powerful financial institutions in the world is broadcasting its hand to the world. And this isn’t just any old hand… It’s the biggest trade it has ever made — valued at more than $1.2 trillion.
If history is any guide, there’s a lot of money to be made from reading the cards right.
Let me explain.
Since 1900, there have been a total of 32 bull markets in U.S. stocks. During this 114-year period, the current bull market is the fourth longest, currently lasting 75 months.
The market bottomed out at 666 in March 2009. It has since surged more than 200% and is now trading above 2,000. In the meantime, international stocks have struggled.
The chart below depicts this disparity, showing the S&P 500 versus the Vanguard FTSE All-World ex-US ETF (NYSE: VEU) over the last five years.
As you can see, the S&P 500 crushed international stocks. This outperformance can be largely attributed to one thing: the Federal Reserve.
After the financial crisis, the Federal Reserve decided to take unprecedented action in order to jumpstart economic growth and bring relief to the troubled financial markets — it began to print dollars to purchase bonds.
This economic maneuver is known as quantitative easing, or QE.
The theoretical effect of QE is two-fold: on one hand, the country’s asset prices rise, while on the other hand, the country’s currency devalues as the money supply increases.
Typically, the central bank’s purchases drive up bond prices, in turn lowering interest rates and encouraging domestic companies and consumers to borrow and spend. We saw this effect play out in the United States, as the yield on the 10-Year U.S. Treasury fell from 5% in May 2007 to a mere 1.7% as of February 2015.
While QE’s impact on the real economy is still being debated, its influence on the S&P 500 is undisputed. After all, the stock market is in one of the strongest bull markets in recent history.
The effects of QE can also be seen in the Fed’s balance sheet. The chart below reveals the 90% correlation between the S&P 500 and the growth of the Fed’s QE program.
In retrospect, the Fed’s program was clearly beneficial to the U.S. stock market.
But if you think you’ve missed out, don’t worry. There’s another wave coming.
Europe is in the early stages of executing its very own QE program. In March, the European Central Bank kicked off a two-year, $1.2 trillion financial stimulation program similar to the U.S. version.
#-ad_banner-#And if Europe’s financial stimulus works anything like what we’ve witnessed in the United States, then Europe along with many other international stocks and bonds could be gearing up for a major bull market.
Let me be clear: it isn’t very often that we get a second chance to profit from such a monumental opportunity. But that’s exactly what I believe is happening.
One safe way for us to profit from this is with the iShares International Select Dividend (NYSE: IDV). This is an exchange-traded fund that invests in global high-yield stocks. With $4.5 billion in assets under management and 99 holdings from all over the world, it’s one of the most popular and liquid international dividend funds.
About 51% of the fund is invested in European countries, with a large portion (18%) invested in the United Kingdom.
IDV has increased its dividend payment in each of the last five years — growing to $2.03 per share in 2014 from $1.32 in 2010. That equates to a 5.7% yield, a huge premium to the S&P 500’s 1.8% yield and the 3.5% yield for the Vanguard FTSE All-World ex-US ETF (NYSE: VEU).
However, the yield doesn’t come at the expense of security. Investing in a fund is often a good way to reduce company risk. In fact, the fund’s largest holding represents just 3% of total assets. More than 50% of the companies in the fund are mega and large caps. The average market cap for a holding is $9.2 billion.
As a group, international stocks have underperformed the S&P 500 for the last three years. That has played out in this fund as well, with IDV up 8% while the S&P 500 gained 75%.
However, that underperformance is creating an opportunity for savvy investors. We only need to remember what happened with U.S. stocks since “QE 1” was implemented in 2008, — the S&P 500 has rallied by about 145%.
A similar situation could play out with international (especially European) stocks.
Also remember that international stocks traditionally offer better yields. The S&P 500 currently yields 1.9%. In the meantime, there are a number of international markets offering more than twice that.
That includes iShares MSCI United Kingdom (NYSE: EWU), yielding 7.1%; iShares MSCI Australia (NYSE: EWA), yielding 4.6%; and iShares MSCI Brazil Capped (NYSE: EWZ), yielding 3.9%.
Again, history is repeating itself. And it isn’t very often that we get a second chance to profit from such a massive trend. The evidence suggests that the European QE program could be every bit as profitable for investors as the U.S. version. I plan on following this trend very closely, and you can be sure that my readers and I will be looking to profit from it.
If you’re looking to for outsized yields, then I encourage you to check out what the international space has to offer. In my premium advisory, High-Yield International, I focus on finding international companies that offer yields better than what we can find here in the United States. That’s why I’ve recently put together a presentation detailing how investors can find more than 100 stocks yielding higher than 12% abroad. To get your hands on this research, go here.