US stocks (SPX Index) have outperformed international stocks for many years, especially from the global financial crisis lows. The outperformance of US stocks over the past decade-plus may have led to portfolio allocations shifting to favor US equities at the expense of international equities, creating a US bias in portfolios – not just for US domestic investors but also for global investors.
The US equity market may be the largest in the world, but it has fallen to only represents around 46% of the global equity markets. If this trend continues, international stocks can play an influential role in stock portfolios in the years ahead.
US and international markets often move in multi-year cycles of relative outperformance and underperformance. While it is difficult to know when to favor one market over the next, the relative strength analysis studies, especially the monthly study, warn structural investment shift may be developing.
Some academic and sell-side research studies point to international stocks outperforming US stocks over the next 20 years. Some professional money managers also suggest non-US stocks are mispriced and are trading at a substantial discount to their counterparts, offering long-term buying opportunities.
Although every investor has unique risk tolerance and timeframe, it may be best to review the portfolio allocations and rebalance them to ensure that there is not too much bias toward US equities, at least from a long-term diversification perspective. A long-term investor that does not own any international stocks in your portfolio may be time to add to your portfolio. After all, owning international and domestic equities can help to smooth out the current volatility in the marketplace.
Will 2023 be the year that international stocks outperform US stocks?
Although it is still early in the year, international stocks are off to a good start as the MSCI All Country World ex-USA index has outperformed SPXs year-to-date.
Some believed the slowdown in the US dollar amid US economic uncertainties and rate hikes favors a rotation into international stocks.
Others suspect widespread concerns about Europe heading into a deep and prolonged recession as the Ukraine-Russian war scenario escalated did not materialize, lifting the pressure off European stocks.
Many others suggest US stocks have enjoyed such a prolonged period of outperformance that US stocks have become overvalued, especially in the growth-related areas. International stocks may represent a value call in a less robust stock market. Also, emerging market stocks may offer higher growth prospects for growth-oriented investors.
So, what are the technicals saying about US and international stocks?
Enclosed are relative strength analysis of SPX versus MSCI World ex-USA from a monthly and daily perspective. Another study shows SPX and China (Shanghai Composite), SPX and Japan (Nikkei 225), SPX and Europe, Australia, and Far East (MSCI EAFE), and SPX and Emerging Markets (MSCI EMF).