U.S. Versus International
The S&P 500, an index of large U.S. companies, posted a total return of 8.1% for the First Quarter of 2021. U.S. stocks outperformed international for the quarter as measured by the iShares MSCI EAFE ETF, a representation of international stocks outside the U.S. EAFE total return for the First Quarter of 2021 was 5.8%.
U.S. stocks have consistently outperformed International stocks for the past 13.3 years. Outperformance has exceeded 200% over this time. The significant growth in U.S. companies, which has been dominated by technology, has eclipsed foreign markets. A predominant increase in the U.S. dollar has also contributed to outperformance of U.S. stocks versus international. When the U.S. dollar increases the value of the international stocks that have been purchased with U.S. dollars but are primarily valued in foreign currencies automatically falls.
Looking forward, there are signs this trend could change. International stock prices are significantly cheaper than U.S. ones. The price-to-earnings discount is currently -25.7% as of March 31, 2021, meaning that international stocks are 25.7% cheaper than U.S. stocks on average. Growth opportunities are also better for many international stocks, as data compiled by J.P. Morgan shows that European companies are expected to grow by 33% in 2021 versus 26% for U.S. companies.
U.S. Sectors
Top performing U.S. S&P 500 sectors as reported by Bespoke Investment Group for the first quarter of 2021 by total return included Energy (29.8%), Financials (19.1%) and Industrials (10.7%). Laggards for the fourth quarter include Consumer Staples (3.1%), Technology (3.8%) and Health Care (5.2%).
Value stocks continued to stage a relative rebound versus growth stocks in the first quarter. Value stocks are represented by Industrials, Financials, Energy, Materials, Real Estate, Utilities and Consumer Staples. Growth stocks are represented by Communication Services, Technology, Health Care and Consumer Discretionary. The gap between valuation of value stocks versus growth has significantly narrowed. However, value stocks remain significantly less expensive versus growth.
U.S. bonds suffered a significant loss in prices in the first quarter, with the Barclays Aggregate Bond index falling 3.0%. Ten-year treasury yields spiked 81 basis points from 0.93% to 1.74%. Additional fiscal stimulus prompted increased fears of inflation, which spooked rate markets. The Federal Reserve has since stated they believe inflation can be contained within a reasonable level while economic growth prospects increase.