Chart of the Week: Diverging Valuations (Continued)

Chart Diverging Valuations 12 2018

If the chart above looks familiar that is because it was also the Chart of the Week on September 21, 2018. It displays the relative valuation (P/E) of U.S. stocks (Russell 3000) versus stocks of the rest of the world (MSCI ex U.S.). In September, we pointed out the valuation divergence had widened out to a 40% U.S. premium. Fast forward three months and the premium is now only 27%, a substantial move given the short amount of time. The reduction in premium is of importance and the path of convergence is worth understanding. There are several ways for the two valuations to converge. The best scenario would be international markets outperforming, driving valuations higher until they catch up to U.S. valuations. The least desired path is international valuations falling lower due to declining international markets, while U.S. markets decline at a faster pace, causing U.S. valuations to converge with international markets. The current convergence path is the least desired. International markets have fallen about 14% since September 21, while U.S. markets have declined almost 19%. Even with this recent move, there is more room for convergence. This trend is worth paying attention to as we move into 2019.