Since 1974 there have been repeating outperformance and underperformance cycles between US equities (SPX Index - SPX) and international stocks (MSCI World ex USA - MSWORLD). For instance, from 1974-1980 international stocks outperformed US stocks. SPX then outperformed MSWORLD from 1981-1985. MSWORLD took over leadership during 1985-1990. US stocks outperformed international equities during 1990-1999. International once again assume a leadership role during 2000-2009. Since 2010, SPX has consistently outperformed MSWORLD.
Although US investors hope for US stocks to continue to perform well, the outperformance cycle for the US versus international stocks has lasted an average of 7-years. It has been 9-plus years into the current cycle of US outperformance versus international equities.
Does this then imply there will soon be a change in tide to favor international stocks, at least from a relative strength perspective?
International equities are too big to simply ignore. It is especially true when home-country bias leads many US investors to heavily favor US stock thereby ignoring the rest of the global investment universe. It means that if a portfolio only holds US stocks, it may be ignoring potential investment opportunities in non-US markets, develop and emerging. If international equities begin to outperform US stocks, then US concentrated stock portfolios may be vulnerable to an extended period of underperformance.
A relative performance study of the SPX/MSWORLD ratio (currently at 1.78) confirms the relative outperformance and underperformance cycles between the two markets over the past 46 years. Since 1990, the cycles have extended to around 10-years as compared to around 4-6 years in the periods before 1990. Recently, SPX/MSWORLD ratio recorded an all-time high of 2.024 (Mar 2020) before establishing a lower-high pattern of 1.996 (Oct 2020). A gap-down has also developed during Nov 2020. Although, the primary trend remains in a bullish uptrend channel investors need to monitor the US/MSWORLD ratio closely for a potential violation of the 30-mo ma (currently at 1.60) and most importantly, the 10-year uptrend (currently at 1.49). A convincing breakdown would confirm and signal the start of a shift toward international stocks over US stocks.
Another technical study, Relative Rotation Graph (RRG), also suggests that for the 8-weeks ending Nov 16, 2020, S&P 500 Index (SPX) has quietly slipped into the Lagging Quadrant from the Leading Quadrant. Although, SPX can cycle back to the Leading Quadrant or transition toward the Improving Quadrant this hints at a loss of relative price and momentum leaderships against a basket of international markets (i.e., Tokyo Nikkei 225 Average, Shanghai Stock Exchange Composite, Dow Jones Europe Index, etc.). Leadership seems to be currently situated among two Asian equity markets (i.e., Nikkei 225 and India Nifty 500 Index). It also appears the bulk of the equity markets currently reside within the Lagging Quadrant (6 equity markets) and in the Improving Quadrant (4 equity markets), which hints at a narrowed based global equity marketplace.
Enclosed below are charts of the SPX/MSWORLD ratio analysis, RRG study of international markets, and international markets currently residing in the Leading and Improving Quadrants.
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