International Stocks Turn To Shine

by | Apr 10, 2023 | Market Commentary, Market Performance

It may not feel like it, but stocks have made a strong comeback since the end of the third quarter of 2022. Despite issues with Silicon Valley Bank and other news items that have roiled the front pages the past couple months, stocks continued to recover nicely from the drop in 2022. The following chart from Koyfin illustrates performance for the following major stock groups since September 30, 2022:

  • iShares MSCI ACWI ex U.S. ETF (ACWX in Purple)
  • NASDAQ Index (CCMP in Green)
  • S&P 500 Index (SPX in Red)
  • Russell 2000 U.S. Small Cap Index (RTY in Blue)

Larger U.S. company stocks have climbed over 10%, with International stocks climbing over 20% the past two quarters. It’s been awhile since we have seen international stock outperformance such as this. The following chart from J.P. Morgan Asset Management shows performance of U.S. versus International stocks. The gray bars represent times when U.S. stocks outperformed International and purple lines illustrate times of International stock outperformance.

U.S. stocks have significantly outperformed International since approximately 2008. That is a very long stretch of outperformance. Outperformance by U.S. or International stocks typically occurs in multiyear chunks based on relative trends in economic conditions. For diversified portfolios that typically hold International stocks long term, outperformance by U.S. stocks can make comparisons to major indices, like the Standard and Poor’s 500 Index, very difficult.

International economic conditions are starting to show signs of stabilization. As yields have risen, investors are taking note of higher dividend opportunities. International stocks historically have a higher dividend yield than U.S. stocks.  However, in recent years this deviation has gotten quite high. As of March 31, 2023, International dividend yields were 1.6% higher than U.S. stocks on average.

Dividend yield is calculated by dividing the stock dividend by price. One major item driving international dividend yields higher is their relative valuation. Dividend yields can climb higher by rising dividends or falling prices. International stocks are selling at a deeper discount than U.S. stocks as measured by price to earnings ratio. The chart below shows international stocks selling at a current P/E ratio of 12.6 x versus 17.8 x for U.S. While U.S. stocks are slightly above their 20-year average, the international stocks are selling for less than their 20 year average.

Predicting future performance is never easy. All we can do is look at history and current conditions. Right now, history and current prices, earnings and dividend yields point to an opportunity in international stocks.