By William Power
For fund investors, "America first" has worked well in recent years. Funds focused on U.S. stocks have drubbed their international-stock counterparts.
Until recent weeks, that is.
In addition to the nonstop news out of Washington — and in some cases, because of it — professional investors in February began to furiously rotate their focus. They trimmed exposure to some of the big technology stocks that have led the market's rally to highs, while increasing their positions in defensive sectors such as healthcare. And notably, they've turned to some international markets including France, Germany and Hong Kong, all of which are up by double-digits so far in 2025.
The result is that the average U.S.-stock mutual fund or exchange-traded fund fell 2.9% for February, according to data from LSEG, formerly Refinitiv Lipper. That trimmed the year-to-date gain to just 0.5%, as the February weakness wiped out most of the gains from January. (See funds-data tables including Mutual-Fund Yardsticks.)
Meanwhile, international-stock funds, which were outgunned by their U.S. counterparts in 2024, reversed the trend by rising an average 2.2% in February, to boost their year-to-date gain to 6.9%. (Last year, U.S.-focused funds soared 17.4%, easily beating international-stock funds' 4.8% rise.)
The question facing investors is whether February "is a warning shot or just an innocuous reset after two years of powerful 'American exceptionalism,' " says Nicholas Colas, co-founder of DataTrek Research, who says he remains bullish on U.S. large-cap stocks.
Some catch-up by international stocks is natural, Colas says. "While all this may seem like investors are fleeing U.S. equities because of policy uncertainty, it is important to remember that non-U.S. stocks fell by 8.8% in the fourth quarter of 2024, while the S&P rose 2.1%," Colas says.
Gina Bolvin, president of Bolvin Wealth Management, says the weakening dollar has helped international stocks so far this year. But they are far behind the U.S.
"Can European stocks catch up? Eh. Maybe," says Bolvin. "Investing overseas is part of a diversified portfolio, and we're seeing that play out in the short term, but I find it hard to imagine a situation in which international equities are up and U.S. domestic stocks are down for an extended period of time."
Whether this is a blip or not, international stocks have their place, other strategists say.
"Toward the end of 2024 and into 2025, international equities were significantly undervalued versus their U.S. equivalents and it's been a long time coming that they finally outperformed last month," says Chris Zaccarelli, chief investment officer of Northlight Asset Management. He says that based on stock action, it "looks like tariffs and trade wars will overwhelm all of the other factors in the short run," but he still believes a diversified portfolio, including owning international stocks, makes sense — "especially as the future becomes increasingly uncertain."
Bond funds rose in February. Funds focused on investment-grade debt (the most common type of fixed-income fund) were up 2.2%, to bring the year-to-date gain to 2.7%.
FINANCIAL FLASHBACK
A look back at Wall Street Journal headlines from this month in history
25 YEARS AGO: 'Nasdaq 5000'
On March 9, 2000, the tech-dominated Nasdaq Composite Index surpassed a then-staggering 5000 for the first time, up from its first breach of 1000 in July 1995.
"It is a crowning milestone in investors' unprecedented love affair with technology stocks," The Wall Street Journal wrote at the time. "It's hard to believe, but the Nasdaq Stock Market is still a 20-something." It was formed in 1971 and included American Express and Anheuser-Busch. both of which eventually moved to the New York Stock Exchange.
Sam Stovall, chief investment strategist at analytics company CFRA, says the late-1990s surge resulted from several factors. "It was overly exuberant earnings projections, fear of missing out, and a constant reminder of being in a new era and that this was different," he says.
Stovall recalled a newspaper kiosk employee asking him for stock research on tech companies. "It was especially the top tech stocks such as Intel and Cisco," he says. That reminded him of the old story of 1929 speculator Joe Kennedy saying that it's time to leave the market when the shoeshine boys offer market advice.
Indeed, that should have been the correct message. The day after the 5000 milestone, the index set its then-record of 5048.62, but that top didn't last long. The index tumbled by 77% to its trough in early October 2002. (Now it's light-years above that level; it hit a record 20173.89 last year.)
The initial break in the index came when Yahoo reported data showing the number of people looking at the site fell disappointingly short of expectations. "The emperor's new clothes were revealed, and nothing was left to support the massive valuations," Stovall says.
- 75 YEARS AGO: Lumber's Leap: Snows, Housing Boom Lift Fir and Pine Prices Near Post-War Highs
- 10 YEARS AGO: Kraft, Heinz to Merge, Forming Food Giant / Deal orchestrated by Heinz owners Warren Buffett and 3G Capital
- By Simon Constable
William Power is deputy section editor of Journal Reports in South Brunswick, N.J. Email him at william.power@wsj.com.
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