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Here is an unusual tip for investors: Shun prosperity.

While it seems reasonable to pour money into booming economies, history suggests that doing the opposite is more profitable, according to Dan Rasmussen, founder of Verdad Advisers, a small U.S.-based money manager.

For 2020, a gauge known as the prosperity index indicates that investors would do well to sidestep the exuberant U.S. market and put their cash to work in less red-hot jurisdictions. Canada qualifies as one reasonable destination for investors’ dollars, but Europe is where most of the biggest bargains are located, Mr. Rasmussen says.

Tilting your portfolio toward Europe’s sputtering economy may seem like an odd move, but “there’s a curious thing about economic prosperity: It happens to be negatively correlated with future stock returns,” Mr. Rasmussen wrote in a note Monday.

To help measure the current state of affairs in any given country, he recommends looking at the prosperity index, the brainchild of investment adviser Russell Pennoyer.

In many ways, this gauge is the opposite of the famous “misery index” developed by economist Arthur Okun back in the stagflationary 1970s. Mr. Okun’s misery index added together the inflation rate and the unemployment rate to get a sense of just how bad things were on Main Street during that miserable decade.

In contrast, Mr. Pennoyer’s prosperity index subtracts the unemployment rate from the growth rate of gross domestic product (GDP) to paint a picture of just how good things are right now.

The prosperity index is highest when GDP growth is decent and unemployment is low. Over the past three decades, it has averaged minus 3.4 per cent in the United States because the unemployment rate is typically far higher than the economy’s growth rate.

But the three-year rolling average of the prosperity index for the U.S. recently rose to minus 1.6 per cent in the third quarter of 2019. That is the highest reading since 2000 and, before that, the economic boom of the 1960s.

This would seem to be good news, and so it is – but not for U.S. investors. Mr. Rasmussen crunches the historical numbers to show that stocks’ returns over the next year tend to move in the opposite direction to the prosperity index. An unusually high prosperity index has typically gone hand in hand with low returns over the next 12 months. An unusually low prosperity index has often been the springboard for much stronger stock-market returns over the next year.

This makes sense. Strong growth and low unemployment encourage investors to project today’s good times into the future, pushing up stock prices. But expensive shares tend to produce mediocre returns, because their lofty valuations swoon at even a flicker of bad news.

In contrast, a lacklustre economy tends to depress investors’ spirits. That drags down share prices and creates the conditions for a big rebound if events turn out even slightly better than expected.

All of this suggests investors may want to steer clear of today’s thriving U.S. economy. Instead, Mr. Rasmussen suggests they send money to countries that are not in such good shape, “where the economic conditions and stock market valuations look more like the U.S. in January of 2010 than January of 2020.”

A dozen jurisdictions have prosperity readings low enough to qualify as attractive destinations. Greece, Turkey, Spain, Italy, France, Austria, Sweden and Portugal are all on that list, as are South Africa, Brazil, Hong Kong and – yes – Canada.

It would take a brave investor to venture into some of these countries, but Mr. Rasmussen says a hefty dose of international diversification is likely to pay off in coming months, especially if investors tilt their holdings toward smaller value plays. Small value stocks tend to produce particularly strong returns after periods in which the prosperity index in a country dips to unusually low levels, he says.

“These are the best times to buy stocks in general and small-cap value in particular in those countries,” he writes.

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