US Stocks Are Less Attractive than Global Options

Still, lower valuations and monetary accommodation suggest investors should consider raising their allocation to non-US equities. And as they do, US investors should preferably gain that exposure via instruments that seek to hedge the foreign currency impact, as dollar strength means equity gains in local currency terms will be muted when translated back into US dollars.

The graph above compares the price-to-book ratio of the S&P 500 Index (VOO), the MSCI Europe Index (FEZ), the MSCI Japan Index (EWJ), and the MSCI Emerging Market Index (EEM).

While the S&P 500 is expensive compared to its 15-year average, Europe, Japan, and emerging markets are all cheaper than their respective 15-year averages.

Also, the United States is trading at 100%, 50%, and 75% premiums over Japan, Europe, and emerging markets, respectively, compared to historical premiums of 88%, 38%, and 58%, respectively. The United States seems to be quite expensive, both relatively and absolutely.

What’s more, as we’ve suggested throughout this series, US stocks don’t have a clear growth catalyst once interest rates rise, or otherwise. You may find value in select sectors such as financials (IYF) and technology (QQQ). International stocks, however, seem to be more attractive than the broader American markets.

Considering current valuations, together with easy monetary policies in other major economies, US stocks are likely to underperform. Still, with the dollar (UUP) likely to strengthen, investing in currency-hedged ETFs makes sense, even if currencies are mean-reverting in the long term.

Another reason for investing in global stocks (ACWI) is the diversification benefits they offer. For more on this portfolio topic, read Why International Diversification Matters Today.