The SPDR S&P 500 ETF Trust (NYSE:SPY) is up 36.1% since it bottomed on March 23, but the potential for a second wave of coronavirus infections has investors concerned about whether or not US stocks are still the best place to be invested.
In a report last week, LPL Financial analyst Jeffrey Buchbinder listed five reasons he believes international equities will continue to underperform U.S. stocks.
1. Relatively Weak Economic Outlook: Buchbinder is projecting a more severe economic contraction in Europe than in the U.S. in 2020. Consensus economist projections are now calling for about 8% Eurozone GDP contraction this year compared to 5.7% contraction in the U.S.
2. International Stocks Are More Value-Oriented: Buchbinder said value stocks are unlikely to outperform growth stocks until there are clear signs of a durable global economic recovery. High-growth tech stocks have roughly a 26% weighting in the S&P 500, whereas tech stocks have only about an 8% weighting in the iShares MSCI EAFE Index Fund (NYSE:EFA).
3. S&P 500 Has Momentum: The S&P 500 has outperformed its international counterparts throughout most of the past decade. Buchbinder said until that dynamic shifts for more than just a month here or there, investors can expect more of the same.
4. Value Is A Poor Timing Indicator: While valuations in international stocks may seem appealing compared to U.S. stocks, Buchbinder said undervalued stocks often remain that way for one or two years. He said stocks with lower valuations have a relatively high correlation to longer-term returns, so investors with extremely long time horizons may find some opportunities in international value stocks.
5. Structural Issues: Deficits and cautious consumers may weigh in investor sentiment as the Eurozone emerges from the crisis in the coming quarters. Buchbinder said Europe has demonstrated impressive coordination in generating a fiscal response to the outbreak, but more coordination will be required to get the economy on the right long-term growth track.
“We find the opportunities in the US market more attractive than developed international when we look out over the next 12 to 18 months,” Buchbinder concluded.
Benzinga’s Take: Over the past 10 years, the SPY ETF total return is 240.6%, while the EFA ETF total return is just 65%. At this point, you can’t blame investors or analysts for simply sticking with what’s working.
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