There should be a name for the syndrome suffered by foreign stock investors over the last decade or so. “Groundhog Day” doesn’t quite cut it, because that event repeats only once a year. It seems like this time of year we always feature a chart showing a healthy YTD double-digit gain in the S&P 500, along with a bond-like gain in EAFE, and a bond-like gain or loss in the MSCI Emerging Markets Index.
After the last two months’ violent reversal of the “re-opening” trade, the major indexes for U.S. Large Cap, Small Cap, Growth, and Value all stood with YTD gains in the 14-16% range. Yes, a few nimble portfolio managers might have migrated out of “re-opening” stocks in early April and into the “old” Large Cap Growth leadership but the surest route to superior performance has been to avoid what’s become an almost annual pitfall since the Great Financial Crisis: Foreign stocks. EAFE and MSCI Emerging Markets already trail the S&P 500’s 16.0% YTD gain by about 8% and 12%, respectively.
It’s near the year’s mid-point and U.S. equities are doing what they’ve done nearly every year since the onset of the Great Financial Crisis: trouncing their foreign counterparts. The S&P 500’s YTD gain of 13.5% is about 500 basis points better than EAFE’s, and 800 basis points above that of the MSCI Emerging Markets Index.
The most likely catalysts for improved relative performance of foreign stocks would be: (1) a bear market; (2) a recession; and, (3) a major downturn in the U.S. dollar. This year has supplied all three, yet the relative strength ratios of most foreign equity composites continue to grind lower as if it’s “business as usual.”
Foreign equities beat the U.S. in the first quarter, but the performance gap that’s opened up since the 2007 market highs remains astounding. While foreign equity valuations (especially within EM) have rebounded from February 2016 lows, the bounce has done little to close the enormous P/E discounts relative to the U.S. market.