Iâm keeping a close eye on this⦠[TradeSmith Daily]( My Hill to Die or Thrive On In 2024
By Michael Salvatore, Editor, TradeSmith Daily Happy New Year, TradeSmith Daily! A new year is an exciting time… We have resolution goals to hit, projects to start (or finish)… And for financial writers, itâs tradition for the bravest among us to stick our neck out with a prediction for the year ahead… So thatâs what Iâll do. Today, Iâll make what I think is a well-reasoned call on the investment niche I think will do well this year… And at the end of the year, either shout âI told you soâ… Or take my lumps, dust off my shoulders, and try again next year. Itâd a bold thing to do, making predictions. The stock market bends for no man. I have great respect for all the analysts at TradeSmith and LikeFolio whoâve spent the last week going public with their own takes, and I think all of them have merit. ([Catch up on those here if you arenât already.]( But we canât let the TradeSmith Roundtable have all the fun. I havenât yet shared this idea in TradeSmith Daily. Weâre not talking about bitcoin, or nuclear energy, or oil again. (Though I maintain all of those will do well next year, too.) Let me show you my brand-new big idea for 2024, and potentially well beyond it… RECOMMENDED LINK [Weâre In The Final Inning Of Americaâs First-Ever Cash Bubble⦠Are You Ready?](
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My big call for 2024 and beyond is that international stocks will outperform U.S. stocks. And the leaders among this group will produce near-unfathomable returns. Hereâs why I think so… Weâre already starting to see international markets pick up. From August 2022 to now, the S&P 500 has returned about 14%. But some standout foreign markets have done heaps more. Like Turkey (TUR), whose ETF has returned 73%… Or Argentina (ARGT) — that ETF returned 88%. And despite this, even when itâs right in front of peopleâs faces, 99% of investors wonât take part. There are two core reasons why I believe the stocks will outperform:
- International stocks often go on long stretches of U.S. stock outperformance, which we havenât seen in many years, but started in 2022.
- International stock valuations are much, much cheaper than their U.S. counterparts.
And the reason I believe most investors wonât participate — probably even most of the investors reading this — is due to a powerful home country bias. Letâs take each factor one at a time. 1. International stocks are already âbeatingâ U.S. stocks… You may find it hard to believe after 2023, but itâs true. On the whole, international stocks are already starting to outperform U.S. stocks. Donât take my word for it. Check out this chart from JP Morganâs Guide to the Markets…
The data shows that, going back to the â70s, the MSCI EAFE (European, Australian, Asian, and Far East) Index goes through long-term periods of outperforming the MSCI USA Index. Those periods are marked in purple on the chart above; the gray is when U.S. stocks outperform the others. These periods of outperformance have lasted about four years, on average, since the 1970s. U.S. outperformance has lasted about 6.5 years on average over the same period. With the most recent period of U.S. outperformance lasting more than double that, at 14.2 years, imagine how hard the pendulum could swing back the other direction. And at the time of the reportâs publishing in late September, it already has started. International stocks lost less than U.S. stocks from the two years between September 2021 and 2023. And if this sustains until April, weâll have an official âregime changeâ according to JP Morgan. Thatâs how the regime change in 2001 began, after the dot-com bubble burst. Then, international stocks outperformed by 65% until 2007. Understand, this doesnât mean U.S. stocks will fall during this time. It just means foreign stocks could do better. If the MSCI USA Index returns 100% over the next 10 years — roughly in line with long-term performance — and foreign stocks outperform in the same way they did in the early 2000s, theyâll return 165%. That alone should convince you that putting part of your portfolio into foreign stocks is a good idea. But letâs look at the stark difference in valuations for the cincher. 2.International stocks are cheaper, too… And not just a little cheaper. A lot cheaper. Take a look at this…
The chart on the left shows the difference between the current 12-month forward P/E ratio between the S&P 500 and the MSCI All Country World ex-U.S. Index. On the whole, international stocks are about 33% cheaper than the S&P 500. Itâs worth noting that over the last 20 years, international stocks tend to have just a slightly lower valuation than the S&P 500: 13.1x versus 15.6x. So while we should expect international stocks to be somewhat cheaper, 33% cheaper is an anomaly. And in a slight but not insignificant boon to the international stock argument, the average dividend yield is 1.8% higher, too. Thatâs the chart up there on the right. So, ahead of what may be a period of international stock outperformance, theyâre also about 33% cheaper and paying out slightly higher dividends. That should attract any investor with an eye toward value. But for most, it simply wonât. 3.Home country bias is a powerful force… No matter where you are in the world, odds are good that you tend to invest primarily in your own country. This chart from Vanguard shows the dynamic in action — of major developed countries, their slice of the global investment pie, and where their investors put their money:
U.S. markets contribute more than 50% of global stock indexes (orange bars), and its investors weight over 79% of their investment in domestic equities (yellow bars). If youâre doing that, congratulations… It was the right move over the last decade. But many countries are guilty of home country bias. Canadian investors, despite contributing just 3.4% to the global index weight, invest in their own stocks by 59%. In Australia, itâs even more extreme. This bias is natural â we all do it. Probably more than 90% of my individual, active portfolio is in U.S. stocks. And my retirement accounts are all-in on the S&P 500. But if weâre entering a period of outperformance for international stocks, we need to strongly consider bucking this bias and putting more exposure elsewhere. So hereâs what Iâm going to watch… RECOMMENDED LINK [Free Demo Inside...](
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Iâm going to closely watch and track the Vanguard Total International Stock ETF (VXUS) this year. This is one of the most broadly invested international stock ETFs that donât include the United States. Hereâs the portfolio allocation, courtesy of Investopedia:
- Asia-Pacific (45%)
- Europe (39%)
- N. America (7%)
- MidEast & Africa (2%)
- Latin America (2%)
The top 10 countries the VXUS is invested in include Japan, the U.K., Hong Kong, Canada, France, Switzerland, Australia, Germany, Taiwan, and India. This fund also has an expense ratio of just 0.07%, making it an efficient vehicle to own. But Iâm not stopping there. Throughout the year, Iâll research and invest in individual foreign stocks that I believe hold good value, are growing fast, and donât hold substantial regional risk. Among the markets Iâm most interested in are India, Argentina, and Japan. Iâll be looking for stocks there. And of course, Iâll be using the TradeSmith best-in-class tools to uncover them. Not to mention the wise counsel of the analysts weâve been hearing from over the last week. International stocks are my hill to die or thrive on in 2024. But as always, Iâm eager to hear what you think. Is there a blind spot to this idea that Iâve missed? Or do you have your own prediction for 2024 that youâd like to share? Write me at feedback@TradeSmithDaily.com, and Iâll look to share your thoughts your fellow readers. To your health and wealth, [Michael Salvatore]Michael Salvatore
Editor, TradeSmith Daily P.S. [TradeStops]( is an essential tool Iâll be using to invest in 2024. The single most important thing to do this year is manage risk. As our Roundtable showed us, there are a number of downside risks on the horizon for all markets. If we donât manage and mitigate those risks, weâre doing our future selves a potentially devastating disservice. TradeStops makes this simple. After the five minutes it takes to set up your brokerage account, you receive a number of actionable moves you can make to [better balance your portfolio and instantly create an exit strategy for every single position](. I highly recommend [checking out better balance your portfolio and instantly create an exit strategy for every single position before you make a single move in the markets this year](. I guarantee youâll find it useful. Get Instant Access
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