When U.S. stocks take a downturn, investors often look for alternative markets to diversify their portfolios. The question on many minds is whether international stocks tend to perform better during such periods. In this article, we'll explore the correlation between U.S. stock market performance and international stock market trends, and provide insights into whether international investments could be a viable option when U.S. stocks are down.
Understanding Market Correlation
The relationship between the U.S. stock market and international markets is complex. While they are interconnected due to global economic ties, each market has its unique characteristics and drivers. Correlation does not imply causation, but it's essential to understand how the U.S. stock market's performance can influence international markets.
Historical Data
Historical data suggests that international stocks have often outperformed U.S. stocks during periods of decline in the U.S. market. For instance, during the financial crisis of 2008, when the U.S. stock market plummeted, many international markets, particularly emerging markets, saw significant growth. This trend can be attributed to several factors:
- Currency Fluctuations: When the U.S. dollar weakens, it can make international stocks more attractive to investors, as they become cheaper in dollar terms.
- Economic Diversification: International markets often have different economic cycles and sectors that may not be directly affected by U.S. market trends.
- Valuation: At times of U.S. market decline, international stocks may offer more attractive valuations compared to U.S. counterparts.
Emerging Markets vs. Developed Markets
It's important to differentiate between emerging markets and developed markets when considering international investments. Emerging markets have shown a strong tendency to outperform during U.S. market downturns. This can be attributed to higher growth rates and more favorable valuations.
For example, during the COVID-19 pandemic, while the U.S. stock market was in turmoil, many emerging market indices, such as the MSCI Emerging Markets Index, saw significant growth. This trend was driven by factors such as strong government support and a quicker recovery in some emerging economies.
On the other hand, developed markets have often been less volatile during U.S. market downturns. While they may not outperform during these periods, they tend to offer more stability and less risk compared to emerging markets.
Case Studies
Several case studies highlight the outperformance of international stocks during U.S. market downturns:
- 2008 Financial Crisis: During this period, the S&P 500 lost approximately 37% of its value. In contrast, the MSCI Emerging Markets Index saw a decline of only 24%, demonstrating the resilience of emerging markets.
- 2020 COVID-19 Pandemic: The S&P 500 fell by approximately 33% from its peak in February 2020. In contrast, the MSCI Emerging Markets Index lost around 20% of its value, showing a relatively better performance.
Conclusion
While it's difficult to predict the future of the stock market, historical data suggests that international stocks, particularly emerging markets, have often outperformed U.S. stocks during periods of decline. Diversifying your portfolio with international investments can provide a level of protection against market downturns in the U.S. However, it's essential to conduct thorough research and consider your risk tolerance before making any investment decisions.