Investors Should Look Abroad Now

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Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

A warm wave of surprise and delight swept across global stock markets today in the wake of yesterday's decision by the Fed not to curtail its $85 billion-per-month bond-buying program. In Asia, the Japanese, Hong Kong, and Singapore markets all gained more over 1.5%. In Europe, three major markets -- Germany, France, and the U.K. -- are all up by roughly 1% or more. But the biggest gains were reserved for emerging markets; in Indonesia and Thailand, for example, benchmark indexes rose 4.7% and 3.3%, respectively.

That phenomenon was foreseeable, given yesterday's performance of the iShares MSCI Emerging Markets ETF , which smashed that of the S&P 500 (note the 2 p.m. EDT spike in both graphs, coinciding with the Fed's announcement):

EEM Chart

EEM data by YCharts.

Getting back to the U.S., it appears there is still a bit of sentiment steam left to push stocks yet higher this morning, with the S&P 500 and the narrower, price-weighted Dow Jones Industrial Average up 0.15% and 0.05%, respectively, as of 10:05 a.m. EDT. This is turning out to be a rather extraordinary month of September; consider, for example, that the S&P 500 has now risen in 11 of 12 trading days so far -- another streak by the grace of Mr. Bernanke's hand?

Ultimately, one has to wonder whether sentiment and momentum have become decoupled from fundamentals and valuation. I'm not certain that the U.S. market is overvalued, but I have a high degree of conviction that it isn't undervalued. As Yahoo! Finance's Michael Santoli remarked on Tuesday, "Disciplined value investors profess a dearth of good buying opportunities."

Which takes us back to overseas markets: I'm convinced that Europe and emerging-market equities offer better value than the U.S. right now. For example, the pessimistic narrative for Europe is well-known, underpinning stock valuations there, whereas U.S. stock prices appear to imply aggressive earnings growth. Yes, the economic outlook for the U.S. is superior to that of Europe, but the key, second-order question is: Which set of corporates will surprise positively (or less negatively, at least) relative to expectations.

Whether you're an asset allocator or a stock picker, that's a question you may want to ask yourself as you conduct research and make investment decisions.

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Fool contributor Alex Dumortier, CFA has no position in any stocks mentioned; you can follow him on LinkedIn. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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