Stamp Your Passport

Anthony Day
Financial Research Analyst

For those of your who have an enhanced driver’s license, it may be time to go to your local post office and upgrade to a passport because we are going international!
History is never indicative of what is ahead, but there is value in understanding the trends and consequences of past cycles. Even more so in the world of investing, where there are consistent cycles that come and go but how people execute within the cycles ultimately dictates their future results.

We are in the midst of a cycle where the US stocks market has experienced its longest period of outperformance relative to the international equity market. Outperformance has gone on for over 100 months, far exceeding the previous outperformance cycle that lasted 90 months and ended in December 2001. In the following 78 months, international equities outperformed their US counterparts with an annualized return of 11.2% versus that of 3.6% for US stocks.

The US outperformance of international equities could be attributed to a few characteristics: first, the US market is thought to be the safest market in the world, so in times of uncertainty investors decide to park their money in US stocks, even in times of slow growth; second, the US was the first country to aggressive cut interest rates which helped jumpstart the economy faster than its counterparts overseas; third, the US Federal Reserve led an expansion of their balance sheet that supported the post-crisis rebound; when you add all of this up, you can come to the judgement that the US markets were a couple years ahead of the international markets, but we believe the tide is about to change.

Looking ahead, when we evaluate the outperformance trend, paired with lower valuations and prospects of faster economic growth, international equities can be an asset class that outperforms in the years ahead. Growing consumer and business confidence in key European Union countries as well as Japan; international corporate profits that have yet to return to their pre-crisis levels, as they remain 50% below their previous highs; failure of the US Administration to push nationalistic policies through Congress helps reassure foreign nations of their relationship with the US over the near term. When we look at all the risk factors both domestically and abroad, while taking historic trends into consideration, we conclude with a very bullish outlook for international equities.


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