Heading into 2018, I listened to many strategy calls from the leading Wall Street players and the consensus view was pounding the table on international stocks over US stocks. Their call was in favor of international because of cheaper valuations and long-term under-performance. This didn't sit well with me. Sure valuation is cheaper but there is a reason for it. The European economy has been recovering from significant issues with a deep Greek recession, the surprise Brexit, and Deutsche Bank whose stock is trading below its crisis 2009 low. Just this week, the ECB cut their growth forecasts and announced they will keep rates at record lows for at least another year.

Here is the chart always universally referenced for the bull case for international stocks:

US stocks

Runnymede favors US over International

The way we saw it was that the US corporations would see big benefits from tax reform, not international corporations. Furthermore, the IMF said back in October that growth in Europe and Japan were expected to slow. As investors, we favor companies (and countries) with steady or accelerating growth over ones with decelerating growth. This has played out as we expected. Global growth has been good in 2018 but there has been a sharp slowdown in European and Japanese manufacturing as seen in the chart below.

international corporations

US stocks leading the way

Given that US growth is the strongest, it is not surprising that US indices are leading the way this year. Technology stocks and small caps have reached new highs. Here are the results through June 14th.

Technology stocks

Will US stocks continue to outperform international stocks forever? The answer is obviously no. At some point, international markets are bound to close the under-performance gap of the last 10 years. Reversion to the mean is almost inevitable. We just don't think the time is now.

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