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More of the Same

Mike Zaccardi

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.

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Roboticus Aquarius
Roboticus Aquarius
9 months ago

My portfolio is heavily weighted towards mid-cap and small-cap, with a healthy EM and Int’l SC presence, so I’ve known this… annoyance… quite a long time now! Regardless, I believe in my approach and the temptation to chase performance is therefore pretty easy to disregard.

I am reaching my goals and that’s all that really matters.

Still, I have to admit – if we do get a repeat of the early ‘oughts, I’m going to be really, really happy!

Purple Rain
Purple Rain
9 months ago

I have followed the Indian economy in relation to the US economy for years. There is a strong correlation between US recessions and a Indian economic boom (with about a year’s lag). The two factors are a fall in US interest rates (that the Fed engineers during each recession averaging 2.5%) and the fall in oil prices (that often accompany a US recession since the US is the world’s largest crude consumer). These two factors combined effectively lead to a “gift” of 3-4 percent to India’s GDP growth through lower interest payments on debt and a smaller energy bill.

Right now we have a rise in oil prices and a rise in US interest rates. Until these two factors change, I don’t see a spurt in India’s GDP growth (I am not sure if this relates to other Emerging Markets).

Last edited 9 months ago by Purple Rain

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