Before the pandemic we had begun to warm up to international stocks. Valuations relative to the U.S. markets had become increasingly attractive after a long stretch of outperformance by U.S. stocks compared with those in Europe and Japan. We had also anticipated that a weaker U.S. dollar would enhance international stock returns for U.S.-based investors.
Then the pandemic hit. Since then we have maintained our preference for U.S. stocks over their developed international counterparts. In 2020 the U.S. market benefited from its heavy concentration in technology, digital media, and e-commerce stocks that are well positioned for the stay-at-home and work-from-home environment. More recently, as the Eurozone has struggled to contain COVID-19, our conviction in our U.S. preference has increased.
“As the end of the pandemic has come closer into view and value stocks do better in anticipation of a full reopening, the environment should theoretically be better for international stocks,” said LPL Financial Equity Strategist Jeffrey Buchbinder. “But the global dominance of the U.S. market has continued in 2021, in part due to sluggish vaccine distribution in Europe, and LPL Research continues to favor U.S. stocks over those in Europe and Japan.”
A look at consensus expectations for economic growth around the world supports our preference for the U.S. As shown in the LPL Chart of the Day, not only is gross domestic product (GDP) growth in the U.S. expected to outpace Europe, the UK, Japan, and the broad emerging markets this year, but the U.S. has also seen the biggest increase in consensus expectations for GDP growth year to date—an increase of 1.9 percentage points to near 6% (source Bloomberg). Earlier this week we upgraded our U.S. GDP growth forecasts for 2021 to 6.25%—6.75%, while maintaining our growth forecast for developed international economies at 3.75%—4.25%.
The reopening of the U.S. economy amid the accelerating pace of vaccine distribution is certainly a big driver of the increase in growth expectations this year. But massive fiscal stimulus—now over $5 trillion—is another key part of the story.
The chart below illustrates how massive this stimulus is relative to the size of the U.S. economy (about 26%), and also how much larger it has been than the response to the Global Financial Crisis in 2008-2009. While U.S. stimulus is comparable in size to Europe’s, U.S. stimulus has included more direct payments and spending, and therefore has been more impactful than stimulus in Europe, which has included more loan guarantees.
We continue to recommend investors focus their regional tactical allocations on the U.S. and underweight developed international equities. We also recommend a modest allocation to emerging market equities, where suitable, to take advantage of a strong economic growth outlook and attractive valuations.
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