Weekly Update

The Case for a Shift Toward International Stocks

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Published November 27, 2020

Our recent articles have described the market’s sudden shift toward value/cyclical market sectors, like energy and financials, and away from the prior market leaders, namely the tech/consumer FANGMA stocks (e.g. FANGMA = Facebook, Amazon, Netflix, Google (Alphabet), Microsoft, Apple). The article below from Delta Research makes the case for a similar shift in market leadership toward non-U.S. markets. A portion of this shift requires an improvement in the pricing and market strength of commodities, as it is those commodities that drive Russia, Brazil, Australia. A look at the rising price of copper and, very recently, of oil, puts that shift in commodity pricing on the table – and emerging markets are holding up well as a result. Herewith is the analysis by Delta:

“The U.S. stock market has been the best performing large economy stock market over the past decade.

S&P 500 vs. Developed & Emerging Markets

The graph below compares the “Buffett Ratio,” or the ratio of total equity market capitalization to GDP, for the U.S. and the nine largest economies. Italy is not included for a lack of data. Although this is somewhat of a rough calculation, it does show the degree to which US stocks are richly valued versus those of other leading nations.

Market Cap to GDP Ratio by Country

At some point, international markets (especially emerging markets) may begin to outperform. In fact, in the past six months, international stock markets have appreciated more than the S&P 500.

S&P 500 vs. Developed & Emerging Markets

Emerging markets (e.g., Brazil, Chile, China, India, Russia, etc.) are expected to have higher long-term earnings growth rates than both the U.S. and other international developed markets. Earnings growth at attractive relative values make having an allocation to emerging markets a reasonable investment choice.

Emerging Markets Earning Growth

Beyond attractive valuation and earnings growth, emerging markets are rapidly becoming the largest economies in the world, driven by huge populations that are increasingly becoming well educated and more affluent.

China, India and U.S. Higher Education

Stock markets sectors often experience “super-cycles.” For example, small capitalization stocks may outperform large capitalization stocks for years. Value stocks outperformed growth stocks for more than a decade up until about three years ago. The outperformance of the U.S. stock market versus international markets is an example of a super-cycle. At some point, the U.S. stock market will not lead all other stock markets. It is impossible to predict the exact timing. What we are able to determine is the fundamental landscape is in place to allow international stocks to continue their recent outperformance for a sustained period of time.”


Market Update

Markets posted gains to begin the holiday-shortened trading week. Energy stocks soared +7% Monday as oil prices continued their recent ascent on optimism about a global post-pandemic economic recovery. The broad market indexes posted a +0.7% gain. The Dow Jones Industrial Average took the spotlight Tuesday, lifting past the 30000 level on a +1.5% daily rise. The apparent selection of former Fed Chair Janet Yellen to head the Treasury Department helped feed the rally. Stocks took a rest Wednesday slipping back -0.2% as jobless claims ticked higher for the second straight week. After a Thanksgiving break, investors came back Friday to push stock indexes higher again, this time adding +0.2% while the Nasdaq outperformed to post its highest-ever close.

Stocks bounced back this week with a +2.35% gain for the S&P 500 (SPY). The Nasdaq 100 (QQQ) posted a weekly high close with a +2.97% rise. Smallcaps (IWM) continued their string of outperformance adding +3.87% for the week.

Warm wishes and until next week.