I love the fall — the foliage; the cool, crisp weather; sweaters and boots; and of course, everything pumpkin. And for this past October, add to that list the largest monthly gain in the stock market since 1976. The Dow Jones Industrial Average (DJIA) rose by nearly 14%, the S&P 500 gained about 8%, and even the NASDAQ gained almost 4%.
Still, while international developed stocks gained 6%, emerging market stocks decreased by 3%. In fact, foreign stocks have lagged behind US stocks in nine of the last ten years. So you might be wondering whether it still makes sense to own international stocks at all.
What’s happening with international stocks?
Right now, international stocks are lagging for a number of reasons, particularly due to factors affecting Europe and China.
In Europe
Inflation is even higher in Europe than it is in the US, having recently risen to 10.7%. That’s partly because European central banks have been slower to increase interest rates to combat inflation compared to the more aggressive rate increases we’ve seen from our Federal Reserve. Eurozone countries are also more dependent on oil imports (especially from Russia) and face higher heating prices as winter begins. Other worries include the recent political chaos in the UK and the ongoing war in Ukraine. And finally, the rapid rise of the US dollar is weakening foreign currencies.
In China
Leader Xi Jinping recently extended his power for a third term and filled his leadership team with loyalists and proteges — Hong Kong’s stock market declined more than 8% on the news. And while China’s economy expanded by nearly 4% in the third quarter of 2022, it will miss its annual target of 5.5%. Economic slowdowns in China tend to impact the economies of other emerging countries significantly.
Why international stocks still matter
Despite such headwinds facing international stocks, diversification across asset classes — including international stocks — is still important. While the US equity market is the largest in the world, it only represents 46.2% of global equity markets. That means that international equities (those from both developed and emerging markets) comprise the other 53.8%. Investing only in US equities would mean you’d be missing out on more than half the world’s investible equities.
Plus, we can’t predict how US or international stocks will perform in the future. The table below shows the annual performance of different asset classes compared to US stocks (the tan row in the middle) from 2006 to 2022. While developed market stocks (“EAFE”) and emerging market stocks (“EM”) have underperformed US stocks for the last ten years, before that, it was the opposite.
Some analysts believe that emerging market stocks are nearing a bottom and poised for a rally. Others believe that slow growth and pessimism are already reflected in the prices of international stocks, and that US stocks, while down, are still expensive.
The chart below shows the relative valuations of US and international stocks. These reflect the differences in these countries’ growth rates, plus how rapidly or slowly they’ve recovered from the pandemic. It’s worth noting that international stocks are cheaper relative to US stocks, which means their current lower valuations could lead to higher returns in the future.
In the short term, we also have to remember that the upcoming midterm elections in the US could add even more uncertainty to the investing landscape. While midterm elections have historically been favorable for stocks, many investors doubt whether history will repeat itself this year. And, of course, the Fed raised interest rates by another 75 basis points this week, and it’s expected to raise them again in December.
Remember: We don’t know what we don’t know
As we often say here at Ellevest, no one can predict what will happen in the future. And as a recent Wall Street Journal article points out, even if you did know what was going to happen, you still wouldn’t be able to accurately predict how investors would react to the news.
With uncertainty on the horizon, staying diversified is still the prudent path for long-term investors.
© 2022 Ellevest, Inc. All Rights Reserved.
Information was obtained from third-party sources, which we believe to be reliable but not guaranteed for accuracy or completeness.
The information provided should not be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice.
The information provided does not take into account the specific objectives, financial situation or particular needs of any specific person.
Investing entails risk, including the possible loss of principal, and there is no assurance that the investment will provide positive performance over any period of time.
Diversification does not ensure a profit or protect against a loss in a declining market. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.