Investors would do well to remember that the current nerve-rattling market has likely not priced in any surprises that might be on the horizon, writes Jason Zweig in an article in The Wall Street Journal, and there’s a good chance that things will get worse before they get better. But while the war in Ukraine rages on, threatening an energy crisis that will likely result in a recession, and growth remains slow in Japan, China, and emerging markets, the U.S. dollar is dominant.
International stocks have been battered by the dollar’s 13% surge this year, with the MSCI index of non-U.S. markets down 20%. But with so much pessimism priced into international stocks, it’s possible that U.S. investors are overlooking how cheap they are and missing out on bargains overseas, Zweig contends. International and U.S. stocks were valued similarly a decade ago, but those non-U.S. markets have fallen to about half the valuation ratios of U.S. stocks.
But while a recession will likely hit foreign stocks—which tend to be from more cyclical industries like banking and manufacturing—harder than U.S. stocks, which lean toward the tech and healthcare sectors, looking past the short term brings a different view. Cyclical industries actually tend to perform better during a bounceback; in the rebound after the 2008 financial crisis, international stocks gained 24% per year over 5 years, while U.S. stocks only grew 15% on average in the same period. The dollar also fell in value during that time.
Even though the boom in international stocks didn’t last long, it would be a miscalculation to bet that the current downward trend is here to stay, the article posits. If the dollar declines from its current high—which is likely—investors would get an extra boost to their returns on international stocks. And with so many negatives already factored in, even a small positive surprise would “make global diversification lucrative again,” Zweig writes.