International Stocks Have Consistently Underperformed U.S. Stocks

Despite the outperformance year-to-date, which may be related to U.S. dollar weakness for the most part, international stocks have consistently underperformed U.S. stocks in the last 22 years. Unless there is a well-documented paradigm change, a switch to those markets may not be justified.

Emerging Markets (EEM) and European stocks (EZU) are gaining year-to-date over 31% and 26%, respectively, while U.S. large caps (SPY) are up more than 13%, which is still a respectable performance.

However, in the last 22 years, U.S. large caps have consistently outperformed international stocks, as the charts of three portfolios invested 100% in each of the markets show.

Allocation chart is shown below:

Source: Portfolio Visualizer

and the performance chart is shown below:

Source: Portfolio Visualizer

A portfolio invested 100% in U.S. large caps has consistently outperformed European stocks and Emerging Markets stocks by a wide margin, on both absolute and risk-adjusted basis. Sharpe for U.S. large caps is 0.55 while it is only 0.37 and 0.29 for European and Emerging Markets stocks, respectively.

Unless a paradigm shift can be justified, the bulk of outperformance year-to-date for European and Emerging Markets stocks can be attributed to the fast decline in the U.S. dollar. If this downtrend slows down, it is possible to witness a reversal towards longer-term average annual performance. However, any switch to international stocks at this point can only be speculative in nature, i.e., it is a high risk bet.

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