The invasion of Ukraine has many investors fixated on developments outside of the United States. The human suffering that has resulted from the war has already been a tragedy, and yet there are risks the conflict could spread beyond the Ukrainian border. As tensions continue to mount between Russia and the West, equity market volatility has spiked. While stocks across the globe have struggled through the start of 2022, international stocks have been lagging for some time. Considering everything going on, some investors are questioning whether it still makes sense to be invested outside of the United States. We believe there are a variety of reasons international stocks continue to have merit.


Diversification is often referred to as the only “free lunch” in investing. When an investor can combine multiple asset classes that are not perfectly correlated, a reduction in portfolio volatility can be achieved. To the extent that both of those asset classes have a positive expected return, the risk reduction comes with little to no cost.

When stock market volatility spikes in response to an exogenous shock, as we are currently experiencing, the correlation of risky assets tends to increase. In this scenario, prices for stocks in different areas of the global market that typically march to the beat of their own drum will begin moving in tandem, usually in a downward direction. This is where the bond allocation becomes critical.

Although diversifying within a stock portfolio will not shield an investor from all bouts of volatility, there are some instances where it has. One such example is referred to as the “lost decade.” Defined as the period from January 2000 through December 2009, the lost decade saw the S&P 500 shed over 9% of its value over an extended 10-year stretch. As the chart below illustrates, those investors that allocated some of their assets to international stocks were able to offset some or all the losses within their domestic allocations.

S&P data © 2020 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. MSCI data © MSCI 2020, all rights reserved. Indices are not available for direct investment. Index performance does not reflect expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results.

Performance is Cyclical

The domestic market has been outperforming international markets for an extended period. The chart below illustrates the return difference between U.S. and international stocks on a five-year rolling basis. As you can see, international returns have been lagging for over ten years. Consequently, it is easy to forget the relative performance between the two has historically been cyclical, given recent experience. Still, there have been several periods in the past where the U.S. has lagged the rest of the world to a significant degree. As it happens, there is a very good reason to believe that this cycle will at some point repeat itself.

Source: Morningstar Direct and Dimensional fund advisors. Data from January 1979 through February 2022. U.S. stocks are represented by the Russell 3000 Index, while international stocks are represented by the MSCI EAFE index from January 1979 through December 1998, and then the MSCI ACWI Ex US Index thereafter Returns are annualized and reflect the 5-year rolling difference between US Stocks and international stocks.

Low Valuations & High Expected Returns

While the U.S. stock market has outperformed non-U.S. markets, it has also become much more expensive from a valuation standpoint. As of the end of February, the S&P 500 traded at a price-to-earnings (P/E) ratio of 21.3.(1) Comparatively, the MSCI EAFE Index, a popular proxy for developed international stocks, traded at a P/E of 14.3.

The P/E ratio measures how many dollars an investor must spend to participate in a dollar of the most recent twelve months of earnings. Investors typically pay a multiple for that dollar of earnings, because after paying the initial purchase price they are entitled to participate in all future earnings commensurate with their ownership interest. Generally, paying a lower purchase price (all things equal) improves prospective returns.

As it stands today, investors are paying a roughly 50% premium when purchasing large U.S. stocks over their international counterparts. Therefore, one should generally expect future returns to be lower with the pricier U.S. market. There are, of course, some valid reasons for the U.S. market to trade at some degree of a premium.

A major justification relates to the relative sector compositions. The U.S. market has a much larger technology sector than the rest of the world, which tends to sport a high P/E ratio. Conversely, the typically low P/E financial sector carries more weight in non-U.S. stock indices. While these factors explain some of the differences, they certainly don’t tell the whole story. The chart below looks at a composite of valuation ratios for the international markets relative to the U.S. market over time. As you can see, international markets have steadily gotten cheaper relative to the U.S. market since the mid-2000s and are currently trading near the most discounted relative level in over 20 years!

 Data from Morningstar Direct, as of 2/28/22. The relative measure compares an equally weighted composite of P/E, P/B, P/S, and P/CF for the MSCI EAFE Index relative to the Russell 3000, which is used as a proxy for the US market. Gaps in the green valuation line reflect missing source data.

It is understandable that investors may be frustrated with the extended underperformance of international stocks in recent years. Compounding that frustration is the uncertainty associated with the war currently raging in Eastern Europe. Still, we believe it is prudent for investors to maintain their allocation to international stocks. History has shown that the performance between U.S. and non-U.S. markets has been cyclical, and the relative valuation suggests international stocks are priced to deliver superior results going forward. Unfortunately, while valuation can provide some useful information about expected returns, it does not provide any insight as to when a reversal might occur. Given that uncertainty, we believe investors are well served by staying diversified.

1. P/E ratio data for both indices was from Morningstar Direct as of 2/28/2022.


  • As of now, it appears the Federal Reserve is poised to raise its benchmark fed funds rate by 0.25% following the conclusion of its policy meeting next Wednesday (3/16). While the war in Ukraine has caused the market to pair back its expectations for the pace of hikes in 2022, it is still pricing in six 0.25% hikes for the year as the most likely scenario.
  • Last Friday, the Labor Department published its highly watched jobs report, which came in much better than expected. According to MarketWatch, economists were forecasting 440,000 new jobs added during February. The actual report showed 678,000, which pushed the unemployment rate down to 3.8%.
  • Economic data releases will be headlined by the February CPI figure to be published on Thursday. According to MarketWatch, economists are forecasting a 7.8% year-over-year increase to headline inflation and a 6.4% increase to core inflation (which excludes the volatile food and energy sectors). Other data to watch for includes jobless claims Thursday, and consumer sentiment and a five-year inflation expectations survey.



  • Listen to Oil Prices and You Can Hear Echoes of the 1970’s (WSJ)
  • February Jobs Rose a Surprisingly Strong 678,000, Unemployment Edged Lower While Wages Were Flat (CNBC)
  • Fed Chair Powell Notes ‘Highly Uncertain’ Ukraine Impact But Says Rate Hikes Are Still Coming (CNBC)



  • Hot New Real Estate Amenity: The Pickleball Court (Axios)
  • Troy Aikman, Tony Romo and the NFL’s Million-Dollar-a-Game Announce Club (WSJ)
  • 50, 100, 150 Years Ago March 2022 (Scientific American)


Source: Morningstar Direct.

Source: Morningstar Direct.



Source: FRED Database & ICE Benchmark Administration Limited (IBA)

Source: FRED Database & ICE Benchmark Administration Limited (IBA)


Source: MarketWatch

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Josh Jenkins is the Chief Investment Officer at Lutz Financial. With 12+ years of relevant experience, he specializes in assisting clients with portfolio construction, asset allocation, and investment risk management. He is also responsible for portfolio trading, research and thought leadership as well as analytics and operational efficiency for the Firm's Financial division. He lives in Omaha, NE.

  • Asset Allocation
  • Portfolio Management
  • Research & Data Analytics
  • Trading System Operation & Execution
  • Chartered Financial Analyst®
  • Chartered Financial Analyst Institute, Member
  • Chartered Financial Analyst Society of Nebraska, Member
  • BSBA, University of Nebraska, Lincoln, NE

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