We were at a softball tournament in St. Louis a few years ago when my wife got hit in the head by a foul ball. The sports complex had four fields with a big concession stand in the middle. The foul ball came over the backstop, over the concession stand, and hit her from behind. What shocked us was that it didn’t come “out of left field” but from a completely different game we didn’t even know was being played. Similarly, international stocks have seemingly come out of nowhere.
International stocks have been the proverbial “red-headed stepchild” of investing. The US stock market accounts for two-thirds of global market value. Further, US stocks have outperformed international stocks in 14 out of the last 15 years, but it might be time to start looking overseas for opportunities.
US stocks are big and have a great track record, but they are expensive when you compare the S&P 500 valuations versus the MSCI EAFE (EAFE stands for Europe, Australasia, and the Far East). US stocks, which have been powered by the Magnificent Seven and the Trump victory, have been losing ground for the last few days while international stocks are up. The Euro Stoxx 600 has gained over 10% year to date compared to the S&P 500’s 2% gain.
Those high valuations are great for already invested money but can hinder new money into the market looking for a good return.
The Wall Street Journal reports that the research firm Research Affiliates shows how high stock prices hinder predicted returns in their projections. The lower costs of international stocks can potentially lead international stocks to outperform US stocks over the next decade. Research Affiliates project that non-US large-value stocks could return about 10% yearly over the next ten years, while US large-growth stocks could gain less than 2% yearly.
Do not read this and sell all your investments and invest in international stocks. International stocks and Europe especially, often find a way to trip themselves up. Though it might be a time to start watching them, and if an opportunity opens up, move a small percentage of your portfolio into foreign stocks.
Here are a few key ingredients that could lead to international stock’s outperformance.
- First, US Mag Seven tech giants are pulling down the US market. The Bloomberg Mag Seven Index is negative 3% so far this year. The MSCI Europe Index only has a tech sector weighting of 7% compared to 31% for the comparable US index. Those stocks are good when they are good but bad when they are bad.
- Second, the U.S. dollar is down 2% this year, which gives a direct bump to international stocks through currency exchange.
- Third, the possibility of an end to the Russia-Ukraine war has given Europe a boost, particularly on the potential for lower natural gas prices in Europe. This was helped by the agreement a few days ago between the US and Ukraine to develop natural resources jointly.
- Finally, the European Central Bank is expected to continue to cut interest rates, while the US Fed is signaling that they will continue to hold rates fairly high.
These conditions look favorable, but I won’t fully trust international stocks in a meaningful way until I see evidence of a sustained turnaround, especially with the high unknowns of tariff risk. I remain neutral on developed international equities, but they have my attention, and I will watch them more closely.
We are a sports family, so we diligently pay attention to the game to avoid getting hit by an errant ball. In this case, no one yelled, “heads up,” and no one near us saw it coming because we couldn’t see over the building. My wife got a concussion, and we learned that if we were sitting in a blind spot to put up our portable tent. Hopefully, international stocks don’t give any of us a concussion, but maybe they do the opposite; maybe they soften the blow of a lackluster decade.
Have a blessed week!
Securities and advisory services are offered through LPL Financial, a registered investment advisor and member of FINRA/SIPC.
Opinions voiced above are for general information only & not intended as specific advice or recommendations for any person. All performance cited is historical & is no guarantee of future results. All indices are unmanaged and may not be invested directly.
The economic forecast outlined in this material may not develop as predicted & there can be no guarantee that strategies promoted will be successful.
Fervent Wealth Management is a financial management and services entity in Springfield, Missouri.
