December 5, 2019
It has been a banner year for global equities, thanks to the S&P 500 Index’s 24.1% gain year to date. Developed market stocks have also climbed in 2019, but they haven’t shined as brightly as their U.S. counterparts—a consistent theme over the past several years.
Underperformance by international stocks has been persistent in this bull market. As shown in the LPL Research Chart of the Day, the MSCI EAFE Index of developed market stocks has underperformed the S&P 500 in 8 of the last 10 years, including 2019 to date.The impact over the entire period: a total return of 241% for the S&P 500 versus a 72% return for the MSCI EAFE.
We don’t expect this trend to reverse in 2020, since many of the same forces that have weighed on international returns are still in play. Non-U.S. developed markets equities continue to face several structural headwinds, including aging populations, greater regulation, less flexible labor forces, and high debt levels that make additional fiscal stimulus politically less palatable. Developed stocks have also battled several short-term headwinds, such as trade uncertainty, a strong U.S. dollar, and political issues.
However, we’re watching a few areas of potential for international developed stocks. The probability of systematic fiscal stimulus, which includes structural reforms, has increased as the impact of additional central bank stimulus has waned. Clarity on trade could also provide a boost, although recent progress has not helped developed stocks’ relative performance. Foreign currency appreciation and relative valuations could be tailwinds as well.
“It has been a challenging ten years for internationally diversified investors,” said LPL Research Chief Investment Strategist John Lynch, “Even though our tactical view continues to favor U.S. stocks over international, we still have conviction in the strategic value of some geographic diversification over the long run.”
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. The economic forecasts set forth in this material may not develop as predicted.
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This Research material was prepared by LPL Financial, LLC.
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