“There’s an opportunity in the international and emerging market stocks that we have not seen in a while”
– Dr. David Kelley, Chief Global Strategist for JP Morgan
U.S. stocks have been a juggernaut in recent years, an undeniable force that has handily out-performed all other asset classes. And we’ve enjoyed the ride given our portfolio’s overweight to domestic equities.
However, there are early signs overseas that this trend may be coming to an end, as we are starting to see the beginning of greater performance for international stocks. This cycle of out-performance is nothing new, with the domestic versus international stock pendulum swinging back and forth for decades now. The Cycles of Global Investment Performance graph below demonstrates the inexorable nature of this tug of war.
Not surprisingly, these periods of relative over and under-performance are driven by the data. Here are some key areas that point towards the advantage on international stocks moving forward:
Valuation: It’s been said of markets that “It’s all about earnings,” which is true in large part, as we are owners of companies through the stock we hold. What we pay for a stock also plays a critical role in just how profitable our investment might be. At today’s levels, it can be said that U.S. stocks are somewhat expensive, while European stocks are fairly valued and Asian stocks are somewhat cheap, historically speaking.
Monetary Policy: Our Federal Reserve began raising benchmark rates in December of 2015, recently accelerating the pace of these hikes. Our central bank is finally moving toward the end of its nine-year-old economic stimulus campaign, which began in the depths of the financial crisis. Meanwhile, we continue to see stimulus from the rest of the world’s central banks as a means of fueling continued economic growth in these regions.
Labor Supply: A key ingredient to continued economic expansion is availability of labor.The U.S. market looks increasingly tight, with the unemployment rate dropping to a post-crisis low of 4.3%. Most economist dub this “full employment” as the 4.3% that remains unemployed is generally not qualified to fill the record high number of job openings we find available now. This simply is not true in the rest of the world, where unemployment rates are twice that of the U.S., or higher, meaning these economies can continue to expand simply through additional hiring.
On the whole, the data makes a very compelling case for international equities moving forward. As such, it’s not surprising to see our friends at J.P. Morgan, UBS, Blackrock, Morningstar, and Goldman Sachs predicting higher returns for international versus domestic stocks over the coming decade. Look for us to tilt our portfolios accordingly, as this story unfolds.
Wade Daniel is the Chief Executive Officer at Wealthquest – a Cincinnati based financial planning and wealth management firm that offers a full range of financial services under one roof, for one simple fee.
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