Are International Stocks an Opportunity or a Chronic Loser?

The U.S. technology boom during the last three years suggest U.S. economic growth is poised to dominate world growth in the coming three years. This is not good news for international stocks.

International stocks have been frustrating investors (the author included) for most of the last 35 years.   As shown in chart 1, with the exception of a brief period of leadership from the end of 1992 to mid-1994 and again from the start of 2003 to mid-2008, diversifying away from USA stocks has mostly proved to be a regrettable decision during the last several decades. 

For various reasons since 1990, it’s understandable how investors could have occasionally been allured by international stocks.   At certain points when the domestic stock market appeared vulnerable – for example near the peak of the dotcom run between 1999 to 2002 or as the U.S. mortgage crisis emerged from 2007 to early-2009 – it was reasonable to assume that diversifying offshore made good sense.  However, international stocks did not escape the dotcom collapse and actually did worse than U.S. stocks during the Great Financial crisis.  

Investors may also have been lured by the prospect of stronger relative growth abroad compared to what the U.S. seemed to offer. When U.S. policy officials were actively attempting to slow economic momentum, investors understandably considered some international diversification. But this rarely proved fruitful in recent decades.  Dollar weakness has usually been a good time to be invested abroad, but even this has not worked that well since 1990.  The only major dollar collapse during the last 35 years was between the end of 2001 to the end of 2003 when international stocks at best were only market performers.  Other periods of dollar weakness since 1990 proved to be short-lived and difficult to time.  Finally, during the last three decades, as international stocks kept underperforming, investors certainly were attracted from time to time by the enticement of cheap valuations. But rather than outperforming, international stocks have simply continued to cheapen sucking investors into a value trap.

So, should investors simply give up on international stocks?   I think this is what many of us have done in recent years – just decided to stick with the momentum of the good ole US of A!   While this approach is tempting, I do offer one gauge which appears worthwhile monitoring when assessing when, and/or if, it may make sense for equity investors to diversify overseas.