The U.S. stock market has been in a strong upward trend in recent years, but that is not always the case. Historical performance since 1970 shows that domestic and international stocks have moved in a cycle of alternating outperformance. While past performance is no guarantee of future performance, this suggests that the cycle will likely swing back toward international stocks at some point. For example, international stocks beat U.S. stocks by a wide margin for most of the 2003-2007 period. Since then, U.S. stocks have generally outperformed international stocks, which is in one of the longest winning streaks for U.S. stocks since 1970 (see chart below).
By investing in international stocks, your portfolio is positioned to take advantage of the potential periods of international outperformance. We are seeing important signs of leadership rotating back to international stocks. For example, consider the following table which shows the returns of SPY (S&P 500 SPDR ETF), EEM (iShares MSCI Emerging Markets ETF), and EFA (iShares MSCI EAFE Index) over the past decade. SPY was the best performing of the three in 6 of the last 10 years and was the best performer in 5 of the last 7 years. However, note the outperformance of international equities this year.
By analyzing this historical data, one can see the benefits of diversification and having an allocation in each of these asset classes. A benefit to utilizing relative strength is that one can adjust their allocation by over/underweighting these asset classes based on which asset class is garnering a higher level of demand from the market.
Until next time, cheers!