Fund returns in the third quarter confirmed the outperformance but not by as much as you might expect from the moves in the underlying assets. The average domestic stock fund rose 5 percent, according to Morningstar, led by portfolios specializing in health care, energy and technology. The average international fund gained 0.1 percent, depressed by losses in India and China funds.
The average taxable bond fund returned 0.7 percent in the period.
Rebecca Patterson, chief investment officer of Bessemer Trust, also finds the discrepancy in investment returns justified.
“The U.S. leadership this year is a reflection of diverging fundamentals in different parts of the world,” she said. “Significant stimulus” — from the Federal Reserve until recently and then from a big round of tax cuts — “has helped lift corporate earnings. I’m not surprised that the U.S. is outperforming by so much this year. I guess the question is: Can the outperformance last?”
It’s a tough one to answer in a world of interconnected economies. Some developments that would worsen conditions at home might cause even greater damage abroad, Ms. Patterson said, while favorable domestic developments might provide a greater lift elsewhere.
If the Fed has second thoughts about monetary tightening and turns more dovish, for instance, it could depress the dollar, easing pressures on foreign economies with large debts denominated in dollars. “The rest of the world could catch up,” she said.
By contrast, an acceleration of the slow-motion trade war that has been worrying investors all year — although not enough to put much of a crimp in market returns — would hurt the domestic economy, but it could damp growth to a much greater extent in places like China, she said. A slowdown in China, in turn, would have a more serious impact on Europe than the United States.
Another potential impediment to European markets, Ms. Patterson said, is the imminent start of a monetary tightening cycle by the European Central Bank. The Fed has been far more hawkish on inflation, but its European counterpart may soon join it in raising interest rates and selling assets acquired in its quantitative easing program.
