After a brief respite last year, EAFE has reverted to its old form by falling 300 basis points behind the S&P 500 so far in 2018. EAFE’s main transgression might simply be that it represents good relative value in a market that’s been rewarding only momentum...
Thanks to the U.S. dollar’s recent spike, foreign equities in dollar terms declined during November while the U.S. markets were celebrating a Trump victory. Thirty-nine of the 49 MSCI country indexes are in bear market territory from the perspective of a dollar-based investor.
Based on comparative valuations alone, one could have made a case for investing in foreign stocks over domestic ones as early as 2010—when EAFE’s valuations sunk to an historical low, relative to the S&P 500. Today, that gap remains extreme.
Our criticism of the widespread trust in “forward earnings” has sometimes been harsh, but consider the following: the latest 12-month forward EPS estimate for the EAFE index is $122.71, virtually matching the forward estimate that was made in January 2006.
Small cap out performance so far in 2008 is baffling. Earnings growth has been weak relative to large caps and valuations are still excessive. Interestingly, EAFE Small Cap Index is underperforming, while its U.S. counterparts are doing well.
Small caps have trailed the S&P 500 performance by 12-15% since peaking out on a relative basis in the spring of 2006. International small caps have broken down even more decisively on a relative basis.