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.
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