2024 was a banner year for U.S. Large Cap stocks, with the S&P 500 outperforming International Developed equities (EAFE) by an impressive 22.5%. This extraordinary gap has many asking, “Is diversification dead?”
2024 in Context
To truly appreciate the magnitude of last year’s performance disparity, consider this: since 1970, there have been only two other years with this level of U.S. outperformance—1995 and 1997. It’s safe to say 2024 was one for the history books.
A Recent Trend, Not an Exception
While the magnitude of 2024’s outperformance is notable, U.S. equities have consistently outshined international in recent years:
Since 2008, international equities have only outperformed domestic four times in a calendar year.
During those years, the average international outperformance was 2.4%.
In contrast, during the years when domestic outperformed, the average was a staggering 11.8%.
It’s no surprise some investors question the value of diversification. But let’s take a step back.
The Cyclical Nature of Leadership
When phrases like, “Why not just buy the S&P 500?” or “There’s no point in owning international equities,” start gaining traction, it’s often a sign of capitulation.
History tells us that leadership between domestic and international equities is cyclical. Over the past 55 years, domestic equities have outperformed international 53% of the time, but the average margin of outperformance is a modest 1.4%. The notion that diversification is dead? That’s recency bias talking.
What Drives the Shift?
The key to understanding domestic vs. international leadership lies in the U.S. Dollar.
A strong dollar typically favors the S&P 500 over the EAFE.
Conversely, a weaker dollar shifts the advantage to international equities. In simple terms, the dollar’s strength can serve as a helpful guide for managing your allocations.
