More of the Same
DO I SOUND LIKE a broken record? Last week, the performance gap between U.S. and foreign stocks widened even further. Vanguard Total Stock Market ETF (symbol: VTI) has now returned 21.6% so far in 2021, while Vanguard FTSE All World ex-U.S. ETF (VEU) is up just 9.4%.
International funds��� relative weakness has become so routine that it rarely makes the financial news. What���s different this time: The economic landscape would seem to favor foreign shares, particularly emerging markets.
Go back one year. Stock markets around the world were in a garden-variety correction���dropping about 10% from their third-quarter peak���with technology companies feeling the brunt of the selling. Small caps and value sectors were holding up a little better.
Then the buying frenzy began anew, and we got the second wave of the COVID-19 bull market that began in March 2020. As 2021 dawned, foreign markets were outperforming, propelled in part by a weakening dollar. But the dollar reversed course and U.S. stocks soon nosed ahead���and that���s where they���ve stayed.
Now consider today���s economic backdrop: inflation fears, climbing commodity prices and rising interest rates. In the mid-2000s, when these factors converged, they proved bullish for foreign firms, especially those in emerging markets. In 2003, 2005 and 2007, emerging market indexes led the bull market charge. That isn���t happening this year. While commodities are on fire in 2021, shares of foreign companies just can���t find their footing���at least relative to the S&P 500.
If you���re like me, you own a globally diversified basket of low-cost index funds, which means just a portion of your portfolio is invested in large-cap U.S. stocks. It can feel like you���re missing out, even if your overall portfolio is up handsomely in 2021.
It���s even tougher for older investors who have a high allocation to bonds. Vanguard Total Bond Market ETF (BND) is down 2.1% in 2021, rivaling its 2013 loss, which was the worst year since the fund began trading in 2007. And that���s with dividends reinvested. Seeing inflation eat away at returns only adds to the unpleasantness.
Bottom line: Financial markets are having a party���but many investors aren���t having a great time.
International funds��� relative weakness has become so routine that it rarely makes the financial news. What���s different this time: The economic landscape would seem to favor foreign shares, particularly emerging markets.
Go back one year. Stock markets around the world were in a garden-variety correction���dropping about 10% from their third-quarter peak���with technology companies feeling the brunt of the selling. Small caps and value sectors were holding up a little better.
Then the buying frenzy began anew, and we got the second wave of the COVID-19 bull market that began in March 2020. As 2021 dawned, foreign markets were outperforming, propelled in part by a weakening dollar. But the dollar reversed course and U.S. stocks soon nosed ahead���and that���s where they���ve stayed.
Now consider today���s economic backdrop: inflation fears, climbing commodity prices and rising interest rates. In the mid-2000s, when these factors converged, they proved bullish for foreign firms, especially those in emerging markets. In 2003, 2005 and 2007, emerging market indexes led the bull market charge. That isn���t happening this year. While commodities are on fire in 2021, shares of foreign companies just can���t find their footing���at least relative to the S&P 500.
If you���re like me, you own a globally diversified basket of low-cost index funds, which means just a portion of your portfolio is invested in large-cap U.S. stocks. It can feel like you���re missing out, even if your overall portfolio is up handsomely in 2021.
It���s even tougher for older investors who have a high allocation to bonds. Vanguard Total Bond Market ETF (BND) is down 2.1% in 2021, rivaling its 2013 loss, which was the worst year since the fund began trading in 2007. And that���s with dividends reinvested. Seeing inflation eat away at returns only adds to the unpleasantness.
Bottom line: Financial markets are having a party���but many investors aren���t having a great time.
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