Michael Batnick presents some interesting data on U.S. vs. International stock market performance since 1969:
Diversifying your equity holdings across multiple continents has been a substantial drag on returns over the last few years. At this point, It’s easy to ask ourselves, “why even bother with international stocks?” The U.S. hasn’t just been instrumental in the global equity rebound, it’s playing lead guitar, drums and doing vocals all at the same time.
But before we go all in on U.S. stocks, history has proven that we should be very careful to extrapolate recent performance out into the future. I was very surprised to learn that when looking at three-year rolling periods, U.S. stocks outperform just 53% of the time. Even more interesting, when U.S. stocks do outperform, they do so by an average of 7.7%; when international stocks outperform, they do so by an average 0f 10%!
The U.S. goes on long streaks of both leading and lagging the rest of the world. The chart below shows long periods of time where U.S. stocks outperform (gray) as well as long stretches of time that U.S. stocks fall behind (without gray).
It seems as if we’ve been hearing that U.S. stocks are “the best house in a bad neighborhood” for years now. November will be the 60th straight month of out-performance, which is the second longest stretch going back to 1972. The longest streak was from 1996 to 2002, a 70 month period of U.S. domination.
How might we know when U.S. outperformance has run its course for this cycle?
(click to enlarge)
An investor can get themselves into a lot of trouble by trying to forecast when the switch in relative strength between U.S. and International markets will take place. One approach is simply to strategically weight the two in an asset allocation and completely remove any element of tactical shifts. That approach has its strength and its weaknesses. The strength is that you ensure that you won’t get whipsawed on any trades and you enforce diversification. The weakness of that approach is that, as shown in both charts above, these streaks of outperformance have historically lasted for many years at a time. With streaks that long there is an opportunity to generate superior performance by making tactical shifts between the two. Finally, the benefit of relying on relative strength to know when to make such tactical shifts is that it removes the need to forecast (guess) when to make the change. With a trend following approach, you will never be in at the very beginning of the trend and you will never be out at the very top, but you will be in a position to capitalize on the bulk of the trend.
This example is presented for illustrative purposes only and does not represent a past recommendation. Prior to the inception date of EFA, performance data is calculated using extrapolated underlying index data. The relative strength strategy is NOT a guarantee. There may be times where all investments and strategies are unfavorable and depreciate in value.
HT: Abnormal Returns
