What Led to the Underperformance of US Stocks?
Where to Look for Opportunities amid Turbulence (Part 2 of 9)
With stocks, favor international.
Stocks struggled last week, although the losses again were most pronounced in the United States. For 2015 so far, U.S. stocks are just about positive, while stocks in Japan (EWJ), Europe (EZU) and even emerging markets experienced better gains.
Market Realist – Major headwinds have led to the underperformance of US stocks.
The graph above compares the performance of the S&P 500 (SPY) with the MSCI EAFE Index (EFA)—which tracks shares from developed markets outside the US and Canada—and the MSCI Emerging Market Index (EEM). The price returns for the three ETFs year-to-date are 1.6%, 7.1%, and 2.3%, respectively.
The underperformance of US stocks is due to many headwinds, as we discussed in the previous part of this series. Meanwhile, Europe (FEZ) and Japan (DXJ) are seeing excess liquidity in their economies through their QE (quantitative easing) programs. This liquidity is supporting stocks. More on this later.
Certain emerging markets (VWO) like Russia (RSX) and Brazil (EWZ) have seen negative stock returns due to their dependence on commodities, whereas economies like India (EPI) are reaping the benefits of lower oil prices.
These factors mean that US stocks could continue to underperform international stocks for a while. However, the rate hike, which is expected to happen in June or September, could lead to funds heading out of emerging markets, which are perceived to be risky.
Read on to the next part of this series to find out how a stronger dollar (UUP) is affecting the performances of large-cap US stocks.
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