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Time to diversify toward international stocks?

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 representing less than 50% of the global equity markets. If this trend accelerates, international stocks can become increasingly influential in investment portfolios in the years ahead.

US and international markets can sustain multi-year cycles of relative outperformance and underperformance. Knowing when to favor one market over the next is challenging, but the relative strength analysis studies (specifically the monthly study) can identify structural long-term investment shifts.

Academics, sell-side research, and professional investors point to international stocks outperforming US stocks because international stocks are cheap and trading at relative discounts to US stocks, offering long-term buying opportunities.

Although every investor has unique risk tolerance levels and timeframes, it is best to review portfolios and rebalance, when necessary, to ensure long-term diversification.

Since most US investors and international investors may have an overweight in US stock allocations due to price appreciations since the 2009 market bottom, diversifying toward foreign stocks can help to smooth out the volatility in the marketplace.

Will international stocks be the new market leaders over the long term?

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 and other indexes (i.e., Nikkei 225, MSCI EAFE, and Shanghai Composite) have outperformed SPX year-to-date.

Is the decline in the US dollar and interest rate concerns accelerating a structural shift toward international stocks?

Or is Europe trading better than expected despite the Ukraine-Russian war lifting the pressure off European stocks, resulting in rotations toward European equities?

Are valuations driving investors to seek out cheaper global markets?

Are US stocks overvalued, especially in the growth areas, after US stocks have enjoyed a decade-plus outperformance cycle?

Are international stocks now considered value investments?

Is emerging markets resuming their role as growth investments?

What are the technicals saying about US and international stocks?

Enclosed are relative strength analysis charts of SPX versus MSCI World ex-USA from a monthly and daily perspective. Another study shows relative strength performances between SPX and China (Shanghai Composite), Japan (Nikkei 225), Europe, Australia, and the Far East (MSCI EAFE), and Emerging Markets (MSCI EMF).

Source: Chart courtesy of

Source: Chart courtesy of

Source: Chart courtesy of

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