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It has been a slow week for financial markets as investors await the US inflation report due in a few hours. As such, it has not been an ideal environment for day trading and short-term stock speculation.
Instead, this is the perfect environment for long-term planning. Summer trading conditions allow investors to step away from the markets as there is plenty of time to consider the opportunities in the months and years ahead.
The US stock market has been rallying in 2023 despite ongoing challenges like the Fed’s tightening cycle. But international stocks (i.e., stocks from countries other than the United States) have rallied even more.
Why should you invest in international stocks?
The US stock market is the largest in the world. It has constantly outperformed international stocks in the last decade, so perhaps, investors are reluctant to move funds to other markets.
But there are plenty of reasons to do so.
The first one is diversification. An uncertain economy, as the one right now, offers the best excuse to diversify the portfolio out of US stocks.
Second, international stocks trade at very low valuations. For example, compared to the S&P 500, the relative P/E ratio for international stocks is 30% below the long-term average.
Third, the weak dollar (e.g., EUR/USD bottomed last October and rallied over 1,500 pips or 15 big figures) favors international stocks rather than domestic ones.
One way to track international stocks’ performance is to look at the MSCI EAFE index.
MSCI EAFE index excludes US and Canadian stocks
The MSCI EAFE index tracks the performance of stocks in 21 developed markets other than the US and Canada. It focuses mostly on European stocks but also includes markets such as Australia, New Zealand, Hong Kong, Singapore, and Japan.
2023 has been a good year for international stocks, as reflected by the MSCI EAFE index. The index formed a possible bullish pattern, a so-called running triangle.
Running triangles in bullish markets are tricky to interpret because most traders consider the pattern a rising wedge (i.e., a bearish pattern). But unless the price action drops below the lowest point in the pattern (wave a), the bias remains bullish with a target of 161.8% of the move before the triangle, projected from the end of the triangle.
In other words, MSCI EAFE might easily go to 3,000 rather than breaking lower.
MSCI EAFE index vs. S&P 500
The chart below shows how international stocks performed compared to the S&P 500 index. Put simply, only between 2003 and 2008 did international stocks outperform US stocks the most.
So, perhaps, given the weak dollar and the prospect that the Fed might reach the terminal rate sooner rather than later, investing in international stocks is not a bad choice.
The post Should you buy international stocks on the possibility of a cyclical comeback? appeared first on Invezz.
