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U.S. Markets Beckon: You Can Go Home

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The Tampa Tribune

Published: January 13, 2008

Even after last year's market mayhem and this year's turbulent start, investment bargains are difficult to come by.

But you have to stash your money somewhere, and it increasingly looks like the best values are found not abroad, but in the U.S. stock and bond markets.

Going back to U.S. If you're a regular reader of this column, you know the drill: You want to build a globally diversified mix of stock and bond funds, preferably index funds, with each fund assigned a target portfolio percentage. Thereafter, you should occasionally check on each fund, to make sure it hasn't strayed too far from its target.

What if you check today? You will likely find you are below target on struggling investments such as U.S. stocks, municipal bonds, high-yield "junk" bonds and real estate investment trusts. Meanwhile, you're probably overweighted on foreign stock markets, especially emerging-markets funds, which posted sizzling 37 percent average gains in 2007, according to investment researcher Morningstar.

Indeed, if you have a disciplined bone in your body, you ought to shun today's international-investing craze, lighten up on foreign funds and buy American.

Filling suitcases. There is an added reason to shift money back home: valuations.

Emerging-markets stocks have notched a cumulative 383 percent total return during the past five years compared with 83 percent for the Standard & Poor's 500-stock index. Result: Today, emerging markets are no bargain.

"They're as richly valued, or maybe more richly valued, than U.S. stocks, and that doesn't make any sense," argues investment adviser William Bernstein, author of "The Four Pillars of Investing."

To make matters worse, the dollar seems cheap compared with other currencies, and it could rally. That would hurt the performance of foreign stock and bond funds that don't hedge their currency exposure. "When you see all the Germans and the French in New York City filling up their suitcases, that tells you something," Bernstein quips.

Betting big. Parts of the U.S. stock and bond markets look increasingly attractive. The S&P 500 is at less than 18 times trailing 12-month reported earnings, not far above its long-term average. In fact, large-company share prices have performed so dismally this decade that the S&P 500 index remains 9 percent below its March 2000 bull-market peak.

"Large-cap price-earnings ratios, relative to small caps, are at low levels based on the range for the past 25 years," says Ken Gregory, a partner at Litman/Gregory Asset Management in Orinda, Calif. He notes that large stocks typically fare well late in the economic cycle.

"When large caps beat small caps, megacaps tend to do even better," Gregory adds. That's why he likes iShares S&P 100, an exchange-traded index fund that owns 100 of the U.S. market's largest companies.

Tax-free municipal bonds look tempting. Despite their tax advantages, munis sport yields that almost rival Treasury bonds, with funds such as Fidelity Municipal Income and Vanguard Intermediate-Term Tax-Exempt recently yielding about 3.7 percent.

Two other U.S. market sectors aren't quite as appealing, but they're getting there. After seven years of impressive gains, real-estate funds ranked as 2007's hardest-hit fund category, tumbling 15 percent.

Don't have any exposure to real estate investment trusts? Maybe this is the year to build up a position in a fund such as Vanguard REIT Index.

"You can't get too excited about REITs for outsized returns," says Chris Cordaro, chief investment officer at RegentAtlantic Capital in Chatham, N.J. "What you're really hoping is that they'll help with diversification."

Also keep an eye on high-yield "junk" bonds, which are yielding about 6 percentage points more than 10-year Treasury notes.

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