Chart of the week

Regime shift in equity markets?

After a down decade, international stocks are showing signs of life again. This week’s chart looks at international stocks’ recent outperformance.

January 13, 2023 | 2 minute read

Return difference: U.S. vs. international stocks

Bloomberg Finance, L.P., as of January 12, 2022. Based on rolling 2-month returns. U.S. represented by the S&P 500 Index. International represented by the MSCI ACWI ex-US Index.

  • The traditional 60/40 portfolio is off to a solid January, after falling -16.1% in 2022, as equity and fixed income markets staged a highly correlated and historic decline.1
  • Despite the strong start, major macro headwinds have not abated entering 2023, particularly for equity investors (the 60 within the 60/40). Domestic valuations remain rich, while the Fed continues to cite the strength of the labor market and easing financial conditions as justifications for their continued hawkishness.
  • Against this backdrop, investors have found growing opportunity in international markets in recent months, as the tide may be slowly shifting following a decade-plus in which U.S. stocks dominated global returns.
  • As the chart shows, international stocks saw limited pockets of outperformance over the last two years—and, in fact, the last decade.1 Is the trend breaking before our eyes? Rising rates have disproportionately hurt the tech/growth-heavy U.S. market while more value-oriented international markets have come to life again. Emerging Asia has been a top performer in 2023 as China exits its zero-COVID policy.
  • Major macro questions remain—chief among them are whether the Fed can engineer a soft landing and if China’s reopening process will continue as COVID cases surge. Active management may be key to capturing returns that are increasingly coming from international markets.

  • Bloomberg Finance, L.P., as of January 12, 2022. 60/40 portfolio refers to 60% allocation to the S&P 500 and 40% allocation to the Bloomberg U.S. Aggregate Index.

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