Stocks have posted solid gains since they started to recover from last year’s painful crash. The MSCI EAFE Index of developed-world stocks outside the US surged by 26.8% from October 2022 through the end of January 2023 in US-dollar terms, outperforming the S&P 500’s 14.3% gain. Four months doesn’t necessarily signal a durable trend. However, since US stocks outperformed international stocks for eight of the past 10 years, many investors are rightly asking whether return patterns may shift this year.
Several developments are challenging the US equity market’s supremacy. In particular, a weaker US dollar and the global implications of China’s reopening are supporting equities outside the US, while several central banks are farther along than the Fed in their monetary policy tightening phases. Market valuation dynamics could add another impetus for international stocks.
US Dollar Depreciation May Favor Non-US Stocks
For most of 2022, the US dollar strengthened sharply against major currencies. The dollar’s appreciation was driven by the US Federal Reserve’s aggressive interest-rate hikes, aimed at curbing a spike in inflation. But since the end of September, the dollar has weakened. While it’s still too soon to declare that the dollar’s downward trajectory will be sustained, the recent weakening is widely seen as a response to softer inflation readings. The market anticipates that a more meaningful decline in inflation will lead the Fed to ease its rate-hiking policy and, eventually, may lead it to begin taking rates down.
That matters for international stocks. Our research shows that when the dollar was weaker over the last 20 years, non-US stocks tended to outperform US stocks (Display). The weaker dollar creates beneficial effects for some countries and select stocks in global markets. And currency fluctuations will factor into returns for US investors who own international stocks, which are worth more after they’re converted back to a relatively weak US dollar.
