After years of the U.S. stock market outpacing nearly all other countries, the rest of the world is showing signs it’s ready to catch up.

To be sure, some of a glimmer of excitement and hope among those championing international diversification happened briefly in 2017. That’s when, for the first time in five years, international stocks beat U.S. stocks by a solid six percentage points, no less. But that hope was soon dashed, as U.S. stocks finished far ahead in 2018. The same is true so far in 2019.

But, could this time be different?  While U.S. indices, most notably the S&P 500 Index (SPY) are hitting all-time highs, most other countries or composite global indices are still well below one, three, and five-year highs.

One thing we’re seeing that is different is some of the developing nations, such as Russia (RSX)  and Brazil (EWZ) , which are closing in on new 52-week highs.

As we broaden our view and look at the All-World ETF (ACWI) which includes developed nations like Germany (EWG) and Japan (EWJ)  have just broken out of a nearly two-year base.  And there is likely more room to run as the markets remain relatively cheap compared to the U.S.

As we telescope out to a two-year picture of the Euro 600 Stoxx, we see the potential for a major breakout.  As technicians like to say, “the bigger the base, the bigger the space.”

If this does occur it would be a welcome development for allocators who have kept the faith and continued rebalancing into international stocks during all these years of US outperformance.

But be aware, while one of the main benefits of international diversification is that domestic and international equities have a relatively low correlation to each other which should reduce overall portfolio volatility.

The rub is that when the U.S. is in a bull market, international stocks tend to be at their lowest correlation and largest underperformance. Meaning, in good times, you might be left behind.

SPY shares were trading at $303.79 per share on Tuesday afternoon, up $0.49 (+0.16%). Year-to-date, SPY has gained 23.25%, versus a 23.25% rise in the benchmark S&P 500 index during the same period.

About the Author: Option Sensei

Steve has more than 30 years of investment experience with an expertise in options trading. He’s written for TheStreet.com, Minyanville and currently for Option Sensei. Learn more about Steve’s background, along with links to his most recent articles. More...

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