The Independent Market Observer

Looking Beyond U.S. Markets

Posted by Brad McMillan, CFA, CAIA, MAI

Find me on:

This entry was posted on Oct 18, 2018 3:44:29 PM

and tagged Commentary

Leave a comment

marketsI am in the process of writing my speech for Commonwealth’s National Conference in November. I have decided to focus on really understanding what is going on with the trade war and what that might mean for investing. That understanding, of course, requires a fairly deep dive into both what is happening and where the war started.

As U.S. investors, we (or, at least, I) tend to be fairly parochial. My commentary on the blog, for example, has paid quite a bit of attention to the recent (rather minor) pullback in U.S. markets. You would think, based on the discussions here, that we’re telling the real market’s story. For U.S. investors, of course, it is. This is why I tend to focus on what's happening in U.S. markets. But when you look at the bigger picture, there are more important things happening.

Stock market crash in China?

Let’s start with the stock market crash in China. Hadn’t heard about that? You are not alone. But look at the chart below. The Shanghai Composite is down 50 percent from its peak in 2015. Looking at more recent data, it is down almost 30 percent this year. For comparison, here in the U.S., the S&P 500 was down more than 30 percent in 2000 and more than 50 percent in 2008. What China has experienced this year is what we saw in the dot-com bust; what China has experienced since 2015 is what we saw in 2008.


China is either the largest or second-largest economy in the world, depending on how you measure it. When the U.S. has a stock market crash, the world notices immediately. When China has not one but two crashes in the past four years, you might expect some reverberations around the world. But we have not seen that. Why that is the case is an important question, as it speaks to the effects outside China if the trade war gets worse. It is relatively easy to wage a war by dropping bombs on the enemy. But it is much harder if the bombs start landing on your own cities. By understanding the links—or lack thereof—between China and the rest of the world, we can get a better idea of the unintended consequences here in the U.S. and around the world if the war gets worse.

Identifying risks and opportunities

This is a high-profile example, but certainly not the only one, of how the underlying economic structure will provide valuable context for identifying investment risks and opportunities going forward. Right now, for example, I am looking at how different trade alliances are likely to shake out. Will Europe side with the U.S.? Or China? How about Japan? Emerging markets? All of these outcomes will make a big difference to the investment profile of these markets for U.S. investors.

It's not that simple, of course. Geopolitics also has to enter into the equation, along with demographics, capital demand and supply, consumer spending growth, and many other factors. We can’t hope to solve the problem. But we can, hopefully, find a couple of key metrics to watch, just as we do with the U.S. economy and markets.

Things will be different this time

If the trade conflicts worsen, things really will be different this time. We need to understand just how different and what that means not only to us but to our allies and opponents. I expect to be writing quite a bit more about this topic going forward. For right now, I have to finish my speech, which is already overdue. Back to work!

Subscribe via E-mail

New call-to-action
Crash-Test Investing
Commonwealth Independent Advisor

Hot Topics

New Call-to-action



see all



The information on this website is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.

Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets.

The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. All indices are unmanaged and investors cannot invest directly into an index.

The MSCI EAFE Index (Europe, Australasia, Far East) is a free float‐adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The MSCI EAFE Index consists of 21 developed market country indices.  

Third party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided at these websites. Information on such sites, including third party links contained within, should not be construed as an endorsement or adoption by Commonwealth of any kind. You should consult with a financial advisor regarding your specific situation.


Please review our Terms of Use

Commonwealth Financial Network®