Published January 6, 2023
After the dot.com market crash of 2000-2002, international stocks went on to outperform U.S. stocks until the 2008 Great Financial Crisis. That rise was driven by two factors: 1) the “buildout” of China which pushed any and all commodity-related stocks (e.g. industrials, materials thus emerging markets) higher, and 2) the decline in the dot.com darlings which had become outrageously priced.
It usually happens that the leader of the market in one cycle becomes the laggard in the next as the excess is worked off. So it was post-2002 as the chart below shows with the black line highlighting the period where international stocks outperformed.
The post-Financial Crisis cycle found financial and “value” stocks on their back foot as an era of easy money pushed up valuations of hotshot growth stocks. The FANGMA stock group led the way. International stocks were grossly outperformed by U.S. stocks led by Apple and Amazon, as shown by the blue trendline below.
Now, we are potentially repeating the post-2002 period. It’s early yet, but international stocks have been outperforming over the past few months as the little upturning black line on the lower right of the chart above shows. The FANGMA stocks are being hammered as investors quickly look to get their valuations back in line. Energy stocks, far and away, led the market in 2022. Now, cyclical and industrial stocks like Caterpillar have been finding buyers.
International stocks are light on tech/consumer companies, with only about 20% of the primary international ETF (symbol: EFA) being comprised of stocks in that sector. As a result, the price/book value ratio of the companies in the EFA is HALF that of the S&P 500. International stocks have become very cheap.
The wildcard is the performance of the U.S. dollar. Until October 2022, the dollar was rising at a torrid pace. It has since backed off. But just to rest and regain strength for another run? Or is the run over?
Further supporting the potential shift to international stocks, in recent months, investors have been pushing money into Chinese stocks as the country has relaxed Covid restrictions and stepped back from the bashing of Chinese tech company leaders. This first week of 2023 has seen an acceleration of that investing theme. This move into Chinese and other international stocks could be a years-long shift that is just beginning.
The first trading day of 2023 continued as 2022 left off, with investors cautious and sellers in charge. Stocks slipped -0.4% to begin the year with Apple and Tesla big losers once again. Tech/consumer stocks have been hammered over the past year as a sharp rise in interest rates has made these high-flying stocks excessively valued. A bit of a rebound Wednesday with investors encouraged by China’s relaxation of Covid restrictions while wary of the Federal Reserve’s continued tough tone on fighting inflation, despite data showing prices in retreat. The +0.8% gain was overwhelmed by a -1.2% drop Thursday as minutes from the most recent Fed meeting offered no encouragement to investors hoping for a friendlier Fed. But the sour tone gave way to a sharp +2.1% rally on Wall Street Friday when the monthly jobs report came out with a possible “Goldilocks” scenario. Though the job market remains tight, wages were shown cooling off their exuberant rise of recent months. With wage gains slowing, investors hope the Fed can chill out on interest rate hikes. At least that was the hope in Friday’s bullish session. Breakouts were seen in wide variety of stocks and sectors.
The last day of the week left market indexes with gains for the week overall. The S&P 500 (SPY) rose +1.48% while the Nasdaq 100 (QQQ) lifted +0.95%. Smallcap stocks (OWM) ticked higher by +1.85%. All three indexes remain capped by their long-term moving averages which served as resistance throughout 2022.
Warm wishes and until next week.