Ex-US Trade is applicable
Foreign stocks have underperformed for so long that it makes sense for many investors to think that last year’s turnaround was a fluke.
Maybe it will be in the grand scheme of things but the former US trade is booming.
Let’s check out some charts.
This is the best start to a year since 1995 in terms of foreign outperforming US stocks:
Looking back to early 2025, the outperformance of European stocks, Asian stocks and emerging markets is now the biggest:
This is a little more than a year’s performance so it is understandable that many investors do not trust this rally. The US stock market has been the only game in town for many years now.
But look at the returns of Germany, South Korea and international small value stocks over the past 5 years:
All outperform the S&P 500 over a 5-year period.
One of the main reasons for the underperformance is the falling dollar.
That’s the end for US-based investors in foreign stocks.
But this is not just a money game. Even in local currencies, these stocks have outperformed the S&P 500 this year:
I don’t know how long this will take. Tech stocks have been so strong in the US for so long that some skepticism is warranted.
However, this new cycle may have legs.
US officials seem to be looking for a lower dollar for their policies. The trade war has changed the way investors and companies view the United States. If the global withdrawal really happens, some countries start loosening their financial reins, and continue to add policies that are favorable to the ownership of shares, international stocks can continue to win moderately in the new cycle.
As a diversified investor, I don’t try to pick early winners. That’s true for inheritance classes and countries. Dimensional Fund Advisors has a great chart measuring the performance of developed country stocks over the year:
As with the asset classes, there is no rhyme or reason from year to year in terms of the best and worst players.
Many investors have abandoned international diversification in recent years, and I don’t really blame them.
I still think it adds value especially in an ever changing world.
I filled in for Michael on What’s Your Thoughts this week with Josh where we talked about international stocks, positive volatility, AI, software stocks, taxing the rich and more:
Podcast version here:
Further reading:
Is Diversification Finally Working Again?
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