International Stocks are Smoking
The S&P 500 is off to a good start this year, but most international indices are outperforming it. As of the April, 22nd close, SPY, an S&P 500 ETF, was up 8.20% in 2023. For the past 12 months, it was down 5.73%. Compare that to two of our largest two international ETF holdings, IEFA, up 11.53% in 2023 and up 2.82% in the past 12 months, and DFIV, up 9.34% in 2023 and up 3.2% over the past 12 months.
International developed country stocks, which have underperformed the U.S. stock market for nearly 15 years, are finally having their day in the sun. Typically, when these shifts occur, they last for several years. A study done by Morningstar last year found that dating back to 1970, there have been ten different time periods that have shifted from the U.S. outperforming to favoring International. International outperformed the U.S. markets from 1970 to 1973, 1976 to 1979, 1983 to 1988, and 2000 to 2008. According to the study, U.S. stocks outperformed from 2008 to last year—the longest period of outperformance in 50 years. It is time for a rotation back to large international countries, and that seems to be occurring.
For most investors, it is difficult to place a large portion of their portfolio outside of the U.S. for many reasons—geopolitical concerns, lack of trust in foreign governments, or flat-out feeling unpatriotic doing so. But we feel that larger international countries have better underlying fundamentals than the U.S. does now. This is largely due to U.S. stock market valuations being ruled by technology firms, which continue to have historically high valuations. Most other countries do not have this concentration in technology and, therefore, have cheaper valuation metrics.
One interesting piece of data is that when Russia invaded Ukraine on February 24, the European ETF, FEZ, closed at $42.06 per share. It continued to decline until October 2022, hitting a low of $30.13. But today, it trades at $46.51 per share – a more than 10% increase from the day the war began. Would anyone have guessed that a European stock index would be positive a year after the invasion of Ukraine? These types of moves up in the face of very uncertain economic times typically indicate a strength that may endure for some time.
We understand our clients’ concerns about investing internationally, but despite that, we have had a decent allocation in most portfolios during this rally the past year. We will continue to favor an above-normal international allocation for the time being. Keep in mind there are many ways to invest internationally. There are broadly diversified large-country ETFs that we own, such as IEFA and DFAI, or more dividend- and value-oriented ETFs such as DFIV and IDV. There are even ETFs in specific countries that you can buy if you’d like to avoid exposure to some areas of the world.
Keep international in mind: It has done well over the past year and so far in 2023. Let us know if you have any questions about your allocation to these markets.
Have a great spring!
Nate Lovelle, CFA
Director – Portfolio Management
Council Oak Wealth
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