The U.S. Breaks Its Winning Streak... Here's What It Really Means

April 2018...

That was the last time U.S. stocks took an "L" versus the rest of the world...

And despite what a lot of folks thought, it meant the best days to invest outside the U.S. were over.

U.S. stocks went on to outperform foreign stocks for more than four consecutive years. That streak ended in December.

Now, foreign stocks are outperforming. So, the big question is, "What happens next?"

You could take this as an opportunity to give up on U.S. stocks... or to make a major portfolio shift outside the U.S. But history shows that, once again, the "obvious" move might not be the right one today.

Let me explain...

U.S. stocks have been one of the best places for your money over the past decade... And owning just about anything else has likely been a drag on your portfolio.

That's why most folks gave up on owning foreign stocks altogether. But now, the U.S.'s impressive winning streak has come to an end.

We can see this by looking at the trailing 12-month returns of the S&P 500 Index and the MSCI World ex U.S. Index.

Based on this rolling measure, U.S. stocks outperformed global stocks for 55 straight months. You can see their incredible run in the chart below...

This chart compares the last two 12-month returns for U.S. and foreign stocks. It cumulates the monthly wins for the U.S. until foreign stocks have a winning 12-month period, breaking the U.S. streak. When that happens, the count resets to zero.

As you can see, the most recent U.S. winning streak began in 2018. And it was the second-longest one on record – only topped by a 56-month string of wins in the 1990s.

It's no surprise that investors have given up on foreign stocks in recent years. U.S. stocks have consistently delivered better returns. And for American investors, home-country bias – the tendency to own more stocks from where you live – is another reason to ignore foreign markets.

Now, the recent winning streak has ended. But the takeaways from history probably aren't what you'd expect...

First, this isn't a bad sign for U.S. stocks. And second, even though U.S. stocks will likely make big gains from here, foreign stocks are still in a prime position to keep outperforming – at least in the short term.

We can look back at past examples to see why...

First, a 49-month winning streak for U.S. stocks ended in 1993. U.S. stocks were up just 2.4% the following year... But three years later, they had jumped 82%. Meanwhile, foreign stocks outperformed for a couple of years, but they had climbed only 29% by the three-year mark.

So, while foreign stocks outperformed in the short term, the U.S. beat foreign stocks handily over the longer period.

Next up, the U.S.'s longest run of straight wins ended in 1999. U.S. stocks were up 12% the following year, but they fell over the next two- and three-year periods. It was a similar story for foreign stocks... except their two- and three-year losses were even worse. So, while times were tough for both groups, the U.S. did better.

Lastly, a 44-month winning streak ended in 2017. U.S. stocks then jumped 21% over the next two years and 77% over the next three. On the other hand, foreign stocks were roughly flat for two years and up just 24% over three years. In other words, both groups rallied over time, but the gains favored the U.S.

This story isn't as simple as owning one or the other. There are two big takeaways from all this data...

First, U.S. stocks can still perform well – even while coming off a hot streak. And they're likely to outperform in the next few years. So, this is no time to give up on the U.S.

Second, foreign markets are still likely to outperform over the next 12 to 24 months. So if you've given up on stocks outside the U.S., now is the time to rethink that strategy.

Either way, given the overall market conditions, you want to be leaning bullish right now. And for the first time in a while, buying stocks in the U.S. and abroad is likely the right move.

Good investing,

Brett Eversole

P.S. Stocks in the U.S. and overseas are both set up for gains in the short term... But even more important, the long-term upside here at home is bigger than anyone believes possible.

That was the message last week when I joined Dr. Steve Sjuggerud for an online briefing. We explained why the major bull market – the one that most people have left for dead – is about to kick back into high gear... And folks who position themselves in the right companies now could see quadruple-digit upside potential.

You can still watch the whole event if you haven't already. All you have to do is click here.

Further Reading

"The Fed's aggressive interest-rate hikes are curing inflation domestically," Chris Igou writes. Now, global economies are catching up. And as these markets follow the U.S.'s inflation-beating playbook, we'll see more opportunities for global investors... Learn more here.

"Foreign stocks are a great way to help you diversify your holdings," Sean Michael Cummings writes. We saw a major example of this last year. While U.S. stocks tumbled, one overseas market held up much better... Read more here.