The Takeaway
The U.S. now represents nearly 60% of the Morningstar Global Markets Index, a level not seen since the late 1990s and far out of proportion to the U.S.' roughly 25% share of the global economy. Today's 10 largest companies are all American, after a Chinese regulatory crackdown shrank global giants Alibaba BABA and Tencent TCEHY.
Corporate bonds are likely to outperform the broader bond market, while emerging-markets bonds look more attractive than their developed-markets counterparts.
We live in an era of corporate leviathans, where the combined market value of just three companies–Apple AAPL, Microsoft MSFT, and Amazon.com AMZN–exceeds the gross domestic product of Japan, the world's third largest economy. Apple and Microsoft deserve kudos, too, for retaining their spot in the global top 10 for over a decade.
"There is nothing permanent except change," said Heraclitus. As investors position their portfolios at the start of 2022, it is useful to look back and examine the evolution of markets over the short and long term. How did market complexion change in 2021? What about over the past decade? Morningstar's global equity and bond indexes can serve as lenses through which to view shifts in sectors, regions, yield, and so on.
The degree to which capital markets evolve should make us humble about forecasting. Ten years ago, how many would have predicted a dominant decade for U.S. equities? In 2011, the United States was smarting from a credit rating downgrade after a debt-ceiling crisis. Its protracted low-growth recovery from the 2008 financial crisis was described using terms like the "new normal" and "secular stagnation." More recently, the U.S. has engaged in a trade war with China and has been hit hard by the coronavirus pandemic and inflation. Yet today, the world's top 10 stocks are all American, including companies that only came to market in 2010 and 2012. Could the coming years see the U.S. underperform other markets, just as the booms of the 1960s and 1990s were followed by deflated decades? Are the market leaders of tomorrow even public yet?
On the bond side, low current yields, inflation, and imminent rate hikes seem to portend meager future returns. But at the start of 2012, in the wake of a sovereign debt crisis and massive quantitative easing, did anyone expect that yields and rates would be even lower in 2022? Over the past decade, we have been warned of a "bond bubble" and heard fixed income dismissed as a "return-free risk." But bonds hardly produced a disastrous decade of real return, despite the U.S. downgrade, eurozone travails, the taper tantrum, four Fed rate hikes in 2018, and 2021's rising yields. Fixed income remains a useful portfolio diversifier, especially valuable during times of equity market stress.
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