While the best returns in the stock market have come from outside the U.S. over the past year, several indicators show that the U.S. market should soon start to take the lead.
In the twelve months through Monday’s close, the S&P 500 had dropped 1.6 percentage points more than the MSCI All-Country ex-US Index, meaning the rest-of-the-world market benchmark had a less horrendous year. But as of early Tuesday afternoon, that outperformance had narrowed to practically nothing.
Even if the MSCI benchmark pulls ahead again, its relative strength shouldn’t last. Much of the rise is related to Asia, specifically China’s reopening following the goverment’s decision in early December to back away its zero-Covid policy and the lockdowns it made necessary.
Real gross domestic product growth in the country was about 3% last year, according to FactSet, paltry for a nation still considered an emerging market. Now that the government is allowing life to return to normal, growth should head to almost 5% this year and just about 5% in 2024, economists expect. That also helps economies in Europe because many Continental companies sell into China and buy supplies there. European luxury-goods companies are one specific beneficiary.
That means stock prices overseas must reflect a likely rebound in growth, with the benefits to corporate profits it would bring. But after that is priced into the market, which may have already happened, more outperformance versus the U.S. would require some other positive factor.
The rest of the world’s outperformance “could just be a snapback, rather than the start of something more permanent,” wrote analysts at DataTrek.
And outperformance by the rest-of-the-world index has rarely proven sustainable. On several occasions since 2011 when the MSCI index has beaten the
over the course of a year, those outperformances were promptly followed by the U.S. market benchmark pulling ahead, according to DataTrek.
To put matters in perspective, the MSCI index’s highest outperformance over the course of a year never reached 10%.
History says that even if the U.S. market slips behind overseas stocks once again, it likely will take the lead soon enough.
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