Diversify With International Positions

International Stock May Be a Great Way to Diversify

With the current high level of unpredictability associated with US trade and fiscal policy, it is crucial at this time to emphasize the value of diversification.  This is especially true until the Fed feels comfortable enough with inflation to start cutting interest rates, thereby boosting the prospects for domestic stocks.  Until that time (likely summer) it is more important than ever to spread your investment risks among varying markets and sectors. 

The S&P is very close to where it started in January 2025, five months ago.  But as the Grateful Dead said, “What a long, strange trip it’s been.”  The implementation of increased tariffs by the Trump Administration, starting as early as February 4th with China and Hong Kong, has rattled the markets and some of our most important trading partners.  This effort crested with Liberation Day on April 2 when tariffs were announced on nearly every country trading with US. 

US stocks, which had been declining since mid-February on the developing news, plunged in early April in response to the wide-ranging levies.  However, in what has become a pattern, postponements were announced.  As you’d expect, global stock markets have reacted with intense volatility.  In hindsight, the tariff announcements to date appear to be part of negotiating strategy.  In the short run that means an increased level of uncertainty, leading to heightened market volatility. 

International stocks have shown on-gain, off-again performance over the last 10 years or so.  So far in 2025, the pattern is continuing, and it is an ON year.  Several factors are driving this: fiscal stimulus in Germany, corporate reforms in Japan and Sout Korea, a weakening US dollar, signs of stabilization in China, and an improving policy environment in Europe.

International stocks continue to be in a good position as we approach mid-year 2025.  Their valuations are generally lower compared to US stocks, and many international companies have domestic business that are not affected by US policy changes.  Looking at the currency markets, lower interest rates here in the US should make the dollar less attractive in the months ahead.  A lower dollar is beneficial to US investors holding international stocks. 

Valuations for international stocks remain attractive, trading at a discount to US stocks.  If earnings growth rebounds, price-to-earnings ratios could increase international stocks continue to be a good opportunity, in our view, for equity diversification.