To Inform:

With four trading days left in 2023, we do not believe it is too early to start looking forward toward markets in 2024. Earlier this week, Alex Durbin shared a piece with The Joseph Group’s Investment Committee written by Strategas’ Head of Technical and Macro Research, Chris Verrone. Verrone was sharing “guesses” of things on his mind which could happen in 2024. Here are two notable and related items on Verrone’s list:

• The U.S. dollar is topping
• Rest of the World > U.S. Assets

If the rest of the global stock market would outperform the United States in 2024, we think most investors would be surprised. According to Verrone, “given developing U.S. dollar weakness, we’re curious if global stocks (emerging markets in particular) have a better shot of gaining some relative traction in the year ahead.”

The relative performance of foreign stocks was a big topic at our recent Portfolios and Pints event and in particular a statistic illustrated in the chart below from Charles Schwab’s Chief Global Strategist Jeffrey Kleintop: “YTD (through November 30^th), the average stock in the EAFE (Europe Australasia and Far East) Index has outperformed the average S&P 500 stock by over 4.5%.”  

Source: Charles Schwab, Bloomberg Data as of 11/30/2023

Foreign indexes do not hold some of the trillion-dollar technology behemoths which have dominated markets in 2023, so the “stealth rally” in foreign stocks may go unnoticed when looking at size-weighted indexes. However, the average foreign stock outperforming the average U.S. stock is interesting, particularly since it is happening with only one cylinder of a three-cylinder engine firing. We believe there are three pieces which could come together to support foreign stock outperformance:

• Strong earnings: YES – this is happening. When we look at recent positive performance from foreign stocks, positive earnings growth appears the most supportive factor.
• Weaker dollar: NOT YET. Comparing the MSCI EAFE index to a version of the index which hedges currency, we can infer a rising dollar has been about a 2.4% drag on foreign stock returns YTD through 12/21/23. However, we’ve seen some dollar weakness recently and in the last month, a weaker dollar has contributed about 2% to foreign stock returns, narrowing what was a wider YTD gap. If the dollar weakness in recent weeks is indicative of a trend change, as Verrone suggests, it could favor stronger returns for U.S. investors in foreign stocks in 2024.
• Narrowing of Valuation Discount: NOT YET. The chart below looks at the relative valuation between foreign and U.S. stocks – when the line is going down, foreign stocks are getting cheaper relative to the U.S. and vice versa. The line being at its lowest point in 20 years means foreign stocks are at their cheapest level relative to U.S. stocks in over 20 years – an over 30% discount. If this discount would get back to its historical average, it would imply potential double-digit outperformance for foreign stocks.

Source: JPMorgan Guide to the Markets, November 2023

Bottom line, foreign stocks are having a “stealth rally” in 2023 and while Verrone’s “guess” that the rest of the world outperforms U.S. assets in 2024 may seem controversial, a weaker dollar could add fuel to foreign stocks already showing signs of life.

As we approach the upcoming year, we love to quote Steve Leuthold who famously said, “forecasts are for show, but portfolio changes we make throughout the year are for dough.” Rather than try to forecast “what will happen,” we come up with themes which help us to think about “what could happen” which in turn help us prepare for portfolio changes and navigating the unexpected turns the market is bound to throw at us in 2024.

We invite you to join us for our next Portfolios at Your Place event on January 17^th at 4pm EST (Register here.). Alex and I will be unpacking our “Seven Themes Plus One More for 2024.” It will be a virtual event over Zoom so please invite any friends you think may be interested. The more the merrier!

Written by Travis Upton, Partner, CEO and Chief Investment Officer