The U.S. economy is doing very well, but it’s usually a mistake to extrapolate the recent past when looking towards the future. For instance, consumer confidence in the U.S. is currently near record highs. Unsurprisingly, according to the article below, there is a strong positive correlation between the change in consumer confidence and stock prices over the previous 12 months, meaning stocks rise when consumers feel more positive. However, there is a negative correlation with the change in consumer confidence and stock prices over the next 12 months, because confidence usually doesn’t keep rising, and often worsens.
When determining your equity allocation between the U.S. and Foreign markets (which are currently struggling), it’s important to remember that what has happened, will not necessarily keep happening. We believe maintaining foreign exposure is important as the current gap between U.S. growth and that of the rest of the world is likely to shrink going forward.
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