Is International Finally Ready to Shine?

Is International Finally Ready to Shine?

by | Economic Research, Investment Research

Over the past decade, U.S. investors benefitted significantly by investing at home rather than abroad, as U.S. stocks significantly outperformed their international counterparts. As illustrated in Figure 1, an initial investment of $1,000 in the S&P 500 at the end of 2012 grew to $2,613, excluding dividends, by the end of 2022.

For comparison, the same $1,000 investment in the MSCI Developed Market Index returned only $1,142, while a $1,000 investment in the MSCI Emerging Market Index posted a loss and returned $842.

Looking back at the last decade, investment analysts attribute the outperformance of U.S. stocks to several factors. One major contributing factor is the composition of the S&P 500 Index, which is heavily weighted towards technology and other growth-oriented stocks such as Apple, Amazon, Microsoft, Google, and Tesla.

Image for global valuations John-Rothe

 

This high concentration of technology stocks is not found anywhere else around the world, and as the group outperformed, so did the broader U.S. stock market. Additionally, the U.S. dollar strengthened by approximately 30% over the last decade, which decreased the value of foreign investments when translated back into U.S. dollars.

These two catalysts benefitted U.S. stocks while acting as a headwind for international stocks.

Today international stocks currently trade at more attractive valuations than U.S. stocks after a decade of underperformance. As illustrated in Figure 2, U.S. stocks trade at a higher next 12-month price-to-earnings multiple than international stocks. In addition, U.S. stocks trade more expensive against their historical valuation range, as evidenced by the 10th to 90th percentile range of historical price-to-earnings multiples.

Given the current valuation backdrop, growth stocks’ underperformance in 2022, and recent U.S. dollar weakness, international stocks may become more of a focus for investors in 2023.

Is This Time Different?

Is This Time Different?

by | Investment Research

While doing my daily chart review, I noticed an interesting change within the S&P 500 taking place.

SPX chart from John Rothe

The S&P 500 is clearly still in a downtrend as marked by the red, downward trend line.

But notice the MACD; in the past, the MACD had already formed a buy signal — well before the index “touched” the downward trend line.

This time around, we have a newly formed MACD buy signal as the S&P 500 approaches the trendline.

Is having a not-so-aged MACD buy signal a telling sign that investors are thinking the market will break above the trend? Only time will tell.

For now, it’s just one interesting observation of many.

 

Stocks Trade Higher for a Second Consecutive Month

Stocks Trade Higher for a Second Consecutive Month

by | Investment Research

Monthly Market Summary

  • The S&P 500 Index returned +5.6% during November, outperforming the Russell 2000 Index’s +2.2% return.
  • Cyclical sectors outperformed during November, with Materials (+11.7%) and Industrials (+7.8%), the top two sectors. Energy (+1.3%) was the worst-performing sector as the price of oil declined -6.9%, followed by Consumer Discretionary (+1.5%), which was weighed down by Tesla’s underperformance.
  • Corporate investment grade bonds generated a +6.6% total return, significantly outperforming corporate high-yield bonds’ +3.4% total return.
  • The MSCI EAFE Index of global developed market stocks returned +13.2%, underperforming the MSCI Emerging Market Index’s +15.6% return.

Stocks & Bonds Trade Higher After Encouraging October Inflation Report

Stocks traded higher for a second consecutive month after another encouraging inflation report. Data showed the Consumer Price Index (CPI), which measures inflation, increased +0.4% month-over-month during October. While October’s +0.4% reading was a repeat of September’s +0.4%, it was below the market’s +0.6% estimate. Compared to October 2021, the CPI increased by +7.8% year-over-year.

It was the slowest annual pace of inflation since January 2022 and the fourth consecutive month that the pace of inflation slowed from the prior month. Investors cheered the report as fresh evidence that price pressures are easing after a period of high inflation.

The top story in the bond market was falling Treasury yields as investors wagered that a drop in inflation will allow the Federal Reserve to slow its interest rate hikes. Bonds traded higher as interest rates declined, and the U.S. Bond Aggregate generated a +3.8% total return.

The equity market also traded higher, and the S&P 500 followed up October’s +8.1% rally with another +3.6% gain during November. International stocks joined in on the rally and significantly outperformed U.S. equities as the U.S. dollar weakened. Overall, November was a strong month across asset classes.

Market Internals Highlight Broad Participation During November

A look beyond the S&P 500’s headline return reveals strong market breadth. Breadth measures underlying strength or weakness based on the number of stocks advancing or declining and can be used to analyze market trends. A rising index with strong breadth indicates a large group of stocks participated in the index’s rise, while weak breadth indicates fewer stocks participated.

During November, eight out of the eleven S&P 500 sectors outperformed the broad S&P 500 index.

In addition, 425 of the S&P 500’s 503 constituents traded higher during November. This data suggests investors are becoming more confident in the path forward. While it is encouraging to see such broad participation, markets will ultimately be looking for incoming economic data to support the latest rally.

The Myth of Missing the 10 Best Days in the Stock Market

The Myth of Missing the 10 Best Days in the Stock Market

by | Investment Research

One of the more “sticky” myths in the stock market is that of staying fully invested so you don’t miss the best days.

Charts like this are common among fans of buy and hold strategies:

 

However, what charts like this fail to mention is that the best days often follow the worst days.

There are some powerful arguments that missing BOTH the best and worst days can be beneficial:

 

How can an investor miss both the best and the worst days?

Applying a 200-day moving average as a signal to exit the market has worked surprisingly well.

The majority of the best and worst days occur when the stock market is trading below its 200-day moving average.

Below is the Dow Jones Index going back to January 1, 1929. The red arrows represent the 10 worst days and the green arrows are the 10 best days.

The orange vertical lines are the times when one of these 10 best/worst days occurred ABOVE the 200-day moving average:

 

How to miss the worst days in the stock market

16 out of 20 days occurred below the 200-day moving average. All occurring in the 1930s

If we move ahead to a more “modern” time and use the 1940s as a starting point, 19 out of 20 best and worst days occur below the 200-day moving average:

 

the 10 best days in the stock market 1940 2022

For investors looking for a way to better manage risk in their portfolio, using a 200-day moving average as an exit signal may add a layer of protection and allow them to sleep better at night.