9/29/24

Weekly Market Recap

Last week was very positive for emerging market stocks (up about 6% in just one week). Emerging market stocks are investments in countries such as China, India, Taiwan, and others. These countries are less developed than major economies like the US and the UK. Because of this, there are considerably more risks in emerging markets, but that doesn’t mean they should be ignored by investors. While these countries tend to be riskier, they also typically experience higher economic growth rates than developed economies. Additionally, stocks in the emerging market index tend to trade at much lower valuations compared to the US market. In the long run, valuations matter and should influence an investor’s future rate of return. Furthermore, the strong US dollar has been a drag on emerging market stocks over the past decade. Now that the Federal Reserve has begun cutting interest rates, this could weaken the US dollar, providing a boost to non-US stocks, including those in emerging markets. These are a few of the reasons why we believe investors should have some exposure to emerging markets.

Chart of the Week

Continuing with the theme of US vs. non-US stocks, our chart of the week comes from the JPMorgan Guide to the Markets. This chart shows the relative performance of US and non-US stocks. The purple sections on the chart represent periods when non-US stocks outperformed US stocks, while the gray areas indicate when US stocks outperformed non-US stocks. Notice the extended period from 2009 to 2022, when the US market significantly outperformed the rest of the world. Because of this, many investors are now underweight in non-US stocks. However, take note of the late 1980s, when non-US stocks experienced a massive run of outperformance over just 5.6 years. This was primarily driven by a falling dollar that provided a strong tailwind for non-US stocks. While predicting changes in market leadership is difficult, history shows there have been times when non-US stocks outperformed. Therefore, maintaining an allocation to both US and non-US stocks is generally a prudent approach.

Source: FactSet, MSCI, J.P. Morgan Asset Management. Regime change determined when cumulative outperformance peaks and is not reached again in the subsequent 12-month period. Guide to the Markets – U.S. Data are as of September26, 2024.

Written by:

Ben Rones, CFA®

Senior Analyst at R&R Financial