This week, our Investment Committee spent a fair amount of time discussing the longer-term future of the global economy and investment markets. The primary question on the table was whether the United States’ economy will be able to “outperform” the remainder of the developed world the way it has since the end of the global financial crisis.
To a person, we were in complete agreement the U.S. is a better bet than the remainder of the G-7 and Western Europe. In truth, it was hard to envision a scenario where the EU, the U.K., Canada and Japan suddenly surged. There seem to be too many demographic and institutional headwinds working against these countries and their economies, in general and in aggregate.
However, given our massive deficits—which we can only hope to somehow slow—it was almost as hard to envision the U.S. economy blithely chugging along at a 3%-plus clip. In fact, we were all in agreement U.S. economic growth will likely be slower moving forward than it has been.
Please don’t read that paragraph as meaning we believe everything is poised to completely fall apart. We don’t.
It’s just that our suspicions and forecasts for the U.S. economy, in absolute terms over the next, say, decade would ordinarily call for a much higher allocation to international investments. Ordinarily. Unfortunately, in relative terms, the U.S. will likely remain the best bet of the lot.
Think of it this way: Assume you have grown accustomed to eating filet mignon. Now, further assume you won’t have access to it moving forward. Your choices will be either top sirloin or potted meat. Which do you prefer? Obviously, in this little analogy, the U.S. is the former and, in my opinion, the better choice.
Then there’s the sneaking suspicion developed international stocks don’t provide the diversification you might think they do.
Consider the iShares MSCI EAFE ETF (EFA). It’s a roughly $62 billion exchange-traded fund that purports to track the performance of the MSCI EAFE Index. This is the international equivalent of the S&P 500. While we own shares of EFA in some accounts across our platform, it is not a primary holding in our investment strategies or models.
As of May 15, 2025, according to its “tear sheet” at iShares.com, the broad sector allocation for EFA is as follows:
| Economic Sector | Weighting (%) |
|---|---|
| Financials | 23.49 |
| Industrials | 18.37 |
| Health care | 11.15 |
| Consumer discretionary | 10.21 |
| Information technology | 8.44 |
| Consumer staples | 8.12 |
| Materials | 5.75 |
| Communication | 5.14 |
| Utilities | 3.36 |
| Energy | 3.17 |
| Real estate | 1.87 |
| Cash | 0.94 |
Do you want to know what that looks like to me? A value fund. With the top holdings including companies like SAP, Nestlé, Roche, Novartis, Novo Nordisk, AstraZeneca, HSBC, Shell and Siemens, even more, it looks like a large-cap value fund.
To confirm this, I collected the month-end values of the MSCI EAFE Index and the S&P 500 Value Index from December 2008 through April 2025 and ran a simple correlation equation in an Excel worksheet. It came out to be—drum roll, please—0.905633. Trust me when I tell you, that is an extremely strong positive correlation.
So much so, it suggests adding a developed international fund to an overall equity allocation has about the same diversification effect as a domestic large-cap value fund. In truth, the 16-plus-year correlation between the MSCI EAFE and most large-cap domestic stock indexes is positive enough to call into question the true efficacy of developed international equities in general.
But … but what about the U.S. continuing to flood the global economy with dollars? It seems so troubling. How could the supply of them not eventually swamp the demand? This would make international stocks attractive, if for no other reason than taking advantage of a weaker dollar. Right?
Inquiring minds want to know.
Well, in this instance, you would want to consider an investment that has a weak correlation with our currency. You know, those things that tend to go up in value when the dollar goes down, and vice versa.
Historically, these would include securities or investments in “real” assets of some variety. The type of stuff you can hold, and for which there is some sort of intrinsic value. Examples might include precious metals, crude oil and real estate. Essentially, something for which there is a relatively limited supply and less-than-elastic demand.
Then, you have to do a little playing with the asset class you would like to have, and a weighting that won’t keep you up at night. For instance, what combination of domestic large-cap value and, say, silver would you need to drive down portfolio risk and increase return? Is it a 70/30 mix? An 80/20? Or would you rather use gold or crude oil instead of silver? A basket of commodities? Some sort of inverse fund?
Some of these decisions will be personal preference. However, the point is you won’t have to increase your allocation to international equities to diversify away from U.S. dollar risk—unless you simply want international equities.
For grins, and to show how much more tightly correlated international and domestic equities have become, the correlation between the MSCI and the U.S. dollar since the end of 2008 has been 0.577977. While not as strong as the correlation between MSCI and U.S. value stocks, that is still pretty solid.
Essentially, the bottom line is this: Since the end of 2008, developed international stocks, as defined by the MSCI EAFE, have behaved like—but still significantly underperformed—U.S. large-cap value stocks.
Further, developed international stocks have become more closely correlated to domestic equities. This means investors might actually achieve greater diversification by increasing their allocations to certain commodities during periods of U.S. dollar weakness, as opposed to increasing their international exposure.
If this is sort of confusing today, let me put it this way: Over the next 10 years, would you rather own Microsoft and, say, gold? Or Nestlé and, perhaps, euros? That’s really what it’s boiling down to here.
While past performance is not indicative of future results—and every other caveat you’ve ever read—which one is it? If you’re anything like our Investment Committee yesterday, you might understand why foreign investments can sometimes seem so foreign.
Thank you for your continued support. As always, I hope this newsletter finds you and your family well. May your blessings outweigh your sorrows on this and every day. Also, please be sure to tune into our podcast, Trading Perspectives, which is available on every platform.
John Norris
Chief Economist
Please note, nothing in this newsletter should be considered or otherwise construed as an offer to buy or sell investment services or securities of any type. Any individual action you might take from reading this newsletter is at your own risk. My opinion, as well as those of our Investment Committee, is subject to change without notice. Finally, the opinions expressed herein are not necessarily those of the rest of the associates and/or shareholders of Oakworth Capital Bank or the official position of the company itself.