For US-based investors, being a globally diversified equity investor has been somewhat disappointing since 2010. While global equities have performed strongly on an absolute basis, the non-US component of our portfolios has generally been a drag on overall performance as US stocks have broadly outperformed a basket of international developed and emerging market stocks for the past decade. Though we can remind ourselves that the primary purpose of holding foreign equities is to reduce portfolio risk (not necessarily to enhance returns), this record has led many investors to look at their international stock holdings and wonder “Is this normal?” and “How long might this pattern of returns continue?”
Sadly, we can’t provide an answer to the second question, but the first one is easier to tackle. Importantly, there is no fundamental or academic reason to expect the US to outperform its developed market counterparts on a consistent basis. After all, the US is just one of several ‘developed’ markets around the world, most of which are relatively large, liquid, well-functioning markets with similar volatility and risk characteristics. In fact, when one examines the full history of market returns back to 1970, we see that the odds of US stocks outperforming foreign developed stocks in any given calendar year has been just about even: 25 to 24. (Last year, 2018, broke the tie.)
But long periods of foreign stock underperformance (and outperformance) do occur, and if we squint at the data a bit, some patterns begin to emerge. In the two tables below, I’ve sorted the returns history into four distinct “eras” in which either the US or international stocks are generally outperforming. For the purposes of this analysis, US stock returns are represented by the Standard & Poor’s 500 (“S&P 500 Index”) and international developed markets by the MSCI Europe Australia Far East (“EAFE” Index) of 21 non-US developed markets, with an inception date of 12/31/69.
| Return | Return | EAFE | S&P500 | Return | Return | EAFE | S&P500 | |||||
| Year | EAFE | S&P 500 | Winner | Count | Count | Year | EAFE | US | Winner | Count | Count | |
| 1970 | -11.66% | 4.01% | US | – | 1 | 1989 | 10.54% | 31.69% | US | – | 1 | |
| 1971 | 29.59% | 14.31% | EAFE | 1 | – | 1990 | -23.45% | -3.10% | US | – | 2 | |
| 1972 | 36.35% | 18.98% | EAFE | 2 | – | 1991 | 12.13% | 30.47% | US | – | 3 | |
| 1973 | -14.92% | -14.66% | US | – | 2 | 1992 | -12.17% | 7.62% | US | – | 4 | |
| 1974 | -23.16% | -26.47% | EAFE | 3 | – | 1993 | 32.56% | 10.08% | EAFE | 1 | – | |
| 1975 | 35.39% | 37.20% | US | – | 3 | 1994 | 7.78% | 1.32% | EAFE | 2 | – | |
| 1976 | 2.54% | 23.84% | US | – | 4 | 1995 | 11.21% | 37.58% | US | – | 5 | |
| 1977 | 18.06% | -7.18% | EAFE | 4 | – | 1996 | 6.05% | 22.96% | US | – | 6 | |
| 1978 | 32.62% | 6.56% | EAFE | 5 | – | 1997 | 1.75% | 33.36% | US | – | 7 | |
| 1979 | 4.75% | 18.44% | US | – | 5 | 1998 | 20.00% | 28.58% | US | – | 8 | |
| 1980 | 22.58% | 32.42% | US | – | 6 | 1999 | 26.96% | 21.04% | EAFE | 3 | – | |
| 1981 | -2.28% | -4.91% | EAFE | 6 | – | 2000 | -14.17% | -9.10% | US | – | 9 | |
| 1982 | -1.86% | 21.55% | US | – | 7 | 2001 | -21.44% | -11.89% | US | – | 10 | |
| 1983 | 23.69% | 22.56% | EAFE | 7 | – | |||||||
| 1984 | 7.38% | 6.27% | EAFE | 8 | – | |||||||
| 1985 | 56.16% | 31.73% | EAFE | 9 | – | |||||||
| 1986 | 69.44% | 18.67% | EAFE | 10 | – | |||||||
| 1987 | 24.63% | 5.25% | EAFE | 11 | – | |||||||
| 1988 | 28.27% | 16.61% | EAFE | 12 | – |
The first such era runs from 1970 through 1988, in which the EAFE index vastly outperformed the S&P 500, returning 15.46% per year compared to 10.58% for the S&P 500, an astonishing cumulative outperformance of 858.8%. EAFE stocks beat US stocks in 12 out of 19 calendar years, including a streak of six years in a row from 1983-1988.
US stocks did much better in the second era, 1989-2001, outperforming foreign stocks in 10 of 13 calendar years and returning a cumulative 462% vs. 46.8% for the EAFE index of international stocks. US annualized returns were 14.2% vs. just 3.0% for foreign stocks from 1989-2001, a stunning outperformance of 11.2% annually. But if we reset the beginning of the comparison period back to 1970, US stocks did not begin to outperform foreign stocks on a total cumulative basis until 1996.
| Return | Return | EAFE | S&P500 | Return | Return | EAFE | S&P500 | |||||
| Year | EAFE | US | Winner | Count | Count | Year | EAFE | US | Winner | Count | Count | |
| 2002 | -15.94% | -22.10% | EAFE | 1 | – | 2010 | 7.75% | 15.06% | US | – | 1 | |
| 2003 | 38.59% | 26.68% | EAFE | 2 | – | 2011 | -12.14% | 2.11% | US | – | 2 | |
| 2004 | 20.25% | 10.88% | EAFE | 3 | – | 2012 | 17.32% | 16.00% | EAFE | 1 | – | |
| 2005 | 13.54% | 4.91% | EAFE | 4 | – | 2013 | 22.78% | 32.39% | US | – | 3 | |
| 2006 | 26.34% | 15.79% | EAFE | 5 | – | 2014 | -4.90% | 13.69% | US | – | 4 | |
| 2007 | 11.17% | 5.49% | EAFE | 6 | – | 2015 | -0.81% | 1.38% | US | – | 5 | |
| 2008 | -43.38% | -37.00% | US | – | 1 | 2016 | 1.00% | 11.96% | US | – | 6 | |
| 2009 | 31.78% | 26.46% | EAFE | 7 | – | 2017 | 25.03% | 21.83% | EAFE | 2 | – | |
| 2018 | -13.20% | -4.30% | US | – | 7 |
International stocks took the reins again in the third era, 2002-2009, beating US stocks 66.7% to 11.7% on a cumulative basis (5.2% per year on average). US stocks won the performance contest just once (2008) in eight years, declining 6.4% less than foreign stocks did that year.
We find ourselves today in the fourth era which began in 2010. Including 2019 (year-to-date through August), US stocks have outperformed foreign stocks for 8 of the past 10 calendar years and cumulatively by a wide margin. The S&P 500 has returned 171.5% so far in this decade compared to just 41% for the EAFE index — an average outperformance of 7.85% per year for US large stocks.
Recent disappointment aside, when we examine the full history of market returns, we see that long periods of performance differentials exist between US and foreign stocks, and that the current era is in no way abnormal or unprecedented. This is the nature of diversification – there is always something in your portfolio that will disappoint! And although we are not able to predict the timing of the next era, there is no reason to expect the current outperformance of US stocks to persist indefinitely. Due to their diversification benefits, foreign equities continue to play a vital role in a well-designed, efficient portfolio.
Sources: https://www.theglobaleconomy.com/rankings/Stock_price_volatility/
