An old investment advisor – a man who’d seen fortunes built and unraveled like poorly wound spools of thread – once confided in me. He said that when American stocks strut about, boasting of their gains, international stocks tend to perform a quiet, dignified retreat. A simplification, perhaps, but a truth wrapped in a charmingly cynical package. The market, you see, is a grand theater, and every player has their moment in the spotlight.
For a time, the Americans hold court, their indices climbing like ambitious bureaucrats. Then, inevitably, the pendulum swings. This isn’t some mystical phenomenon, mind you, but a matter of simple arithmetic. The U.S. economy, while undeniably vast, is not an island. It’s a rather large ship, certainly, but even ships encounter currents. And those currents, my friends, can lift other vessels quite nicely.
The Americans, you understand, account for a rather substantial portion of the global market capitalization – around 65%, if my calculations are correct. A truly impressive number, but one that necessitates a counterweight. Think of it as a seesaw. When one side is overloaded with dollars, the other must rise to maintain equilibrium. It’s a question of physics, really, though most on Wall Street seem to prefer faith.
Recently, the international contingent has been putting on a rather admirable show. Last year, developed market stocks outside the U.S., as measured by the Vanguard FTSE Developed Markets ETF (VEA +0.28%), returned a handsome 35.2%. Emerging markets, tracked by the Vanguard Emerging Markets Stock Index Fund ETF (VWO 0.12%), weren’t far behind, posting a respectable 25.6%. The S&P 500, a perfectly adequate index for measuring American exuberance, managed a mere 17.7%. A significant disparity, wouldn’t you agree?
The Trend Persists, and Opportunity Knocks
The performance this year, 2026, has been equally intriguing. VEA is up 9.2%, VWO a solid 8.1%, while the S&P 500 has been content with a modest 1.5%. I suspect this trend will continue. Why? Several factors, some more predictable than others.
First, the dollar. It’s been weakening, a decline of about 9% against a basket of trade partner currencies. A weaker dollar is, shall we say, advantageous for non-U.S. economies. It’s like giving them a slight head start in a race. And, rather curiously, the current administration appears to be encouraging this weakening. President Trump, in a moment of candor, even declared it “great.” A man of simple pleasures, our president, but a keen observer of economic realities nonetheless.
Then there’s the impending departure of Jerome Powell as Federal Reserve Chair. A prudent man, Powell, perhaps too prudent. His reluctance to cut interest rates has been a source of some consternation. If his successor is more amenable to easing monetary policy, the dollar’s decline could accelerate. Capital, you see, seeks the highest return. It’s a rather mercenary impulse, but a powerful one.
And let us not forget the Europeans. They’re finally waking up to the importance of defense spending. The Americans have been urging them for years, and they’re beginning to respond. A rather expensive undertaking, to be sure, but one that stimulates their economies and, consequently, their equity markets. It’s a curious thing, war – dreadful, of course, but remarkably effective at creating demand.
South Korea and Germany: Nations on the Rise
Last year, I drew attention to South Korea and Germany. Korean stocks, as measured by the iShares MSCI South Korea ETF (EWY +2.31%), are up 29% year-to-date, driven by government reforms and a surprising degree of political stability. German stocks, tracked by the iShares MSCI Germany ETF (EWG +0.13%), have climbed a more modest 3.5%, fueled by government investment. A respectable performance, but one that I believe will accelerate.
I anticipate that both nations will continue to outperform the U.S. through 2026. This holds true broadly for non-U.S. advanced nation stocks, as well as many emerging markets. For investors seeking exposure to these regions, the Vanguard FTSE Developed Markets ETF and Vanguard Emerging Markets Stock Index Fund ETF offer convenient, low-cost options. A perfectly sensible approach, wouldn’t you agree? One might even call it… prudent.
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2026-02-13 22:53