By Tim Courtney, Chief Investment Officer
Many investors have given up on international markets, and after the last decade it is understandable. The 10-year stretch concluding in October of 2020 represented the worst rolling 120-month period for international markets compared to the U.S. since the early 1970s when international return data became available.1 The U.S. market outperformed broad international markets by 9.3% a year over that decade. From about 2011 through 2021, the U.S. experienced higher than average returns while international returns were much lower than average.
This extreme U.S. outperformance can be attributed to three main factors. First, the U.S. economy ended up growing faster than other developed markets.2 Second, the dollar strengthened during that time period.3 Third, and probably most significantly, international markets didn’t have legitimate counterparts to corporate behemoths like Amazon, Apple, Facebook, Google and Microsoft that drove U.S. market behavior.
Market returns became more and more dominated by these names as market indexes became so heavily weighted in them. In fact, the S&P 500 was more concentrated (30%) in its top 10 names at the end of 2021 than at any time since at least 1980.4
Will the U.S. outperformance continue? History shows that outperformance has switched back and forth between the international and the U.S. 10 times since the early 1970s, with the most recent run in favor of the U.S. the greatest on record in terms of time and magnitude. However there is now an eleventh leader change as international markets have outperformed the U.S. since late 2021.
The U.S. could recapture the lead, but there will be headwinds. Concentration in the megacap names has led the U.S. market to become more expensive from a valuations standpoint.5 The international markets, on the other hand, are trading at valuations that are much lower than their long-term average.6
Additionally, as the U.S. companies have become bigger and more dominant, the odds increase that they’ll run into regulatory challenges that they have so far escaped. It is also not clear that the dollar will continue to outperform, which could move back toward its long-term trend line of slight annual declines against a basket of foreign currencies.
We believe having a diversified portfolio that includes international exposure is prudent. Over five decades returns in dollar terms for both U.S. and international have been very similar, and owning both has historically allowed investors to smooth returns and beneficially rebalance between the two. If you have any questions, please contact your Exencial advisor.
- DFA Returns (3/31/23) – S&P 500 Index TR and MSCI EAFE ex Japan USD GR
- Federal Reserve Bank of St. Louis (5/4/23) — Gross domestic product
- Trading Economics (5/4/23) — United States dollar
- The Balance (1/4/22) — A handful of stocks increasingly dominates the S&P 500
- Reuters (4/27/23) — As U.S. megacaps soar, some investors are wary of rising valuations
- Morningstar (3/31/23) – Market Price/Earnings in US, Japan, Europe, EM, China
PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE RETURNS. Information and opinions provided herein reflect the views of the author as of the publication date of this article. Such views and opinions are subject to change at any point and without notice. Some of the information provided herein was obtained from third-party sources believed to be reliable but such information is not guaranteed to be accurate. In addition, the links provided within are for convenience only and the provision of the links does not imply any sponsorship, endorsement, or approval of any of the content. We do not guarantee the content or its accuracy and completeness. The content is being provided for informational purposes only, and nothing within is, or is intended to constitute, investment, tax, or legal advice or a recommendation to buy or sell any types of securities or investments. The author has not taken into account the investment objectives, financial situation, or particular needs of any individual investor. Any forward-looking statements or forecasts are based on assumptions only, and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. Any assumptions and projections displayed are estimates, hypothetical in nature, and meant to serve solely as a guideline. No investment decision should be made based solely on any information provided herein and the author is not responsible for the consequences of any decisions or actions taken as a result of information provided in this book. There is a risk of loss from an investment in securities, including the risk of total loss of principal, which an investor will need to be prepared to bear. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular investor’s financial situation or risk tolerance. Exencial Wealth Advisors, LLC (“EWA”) is an investment adviser registered with the Securities & Exchange Commission (SEC). However, such registration does not imply a certain level of skill or training and no inference to the contrary should be made. EWA may only transact business in those states in which it is registered, notice filed, or qualifies for an exemption or exclusion from registration or notice filing requirements. Complete information about our services and fees is contained in our Form ADV Part 2A (Disclosure Brochure), a copy of which can be obtained at www.adviserinfo.sec.gov or by calling us at 888-478-1971.