U.S. stocks and funds are leading the world in the widespread selloff across global financial markets. From the Dow Jones Industrial Average to the Nasdaq Composite Index, American equities are recording greater losses than benchmarks in foreign markets and they are being pummeled by other sectors.
Year-to-date, the Dow has plunged 12 percent, the S&P 500 has slumped nearly 18 percent, and the Nasdaq has cratered about 28 percent.
By comparison, the UK’s FTSE 100 Index is up more than 1 percent, Spain’s IBEX 35 Index has dipped 0.3 percent, the Nikkei 225 Index has lost 7 percent, and the TSX Composite Index has tumbled around 4 percent.
In addition, exchange-traded funds (ETFs) that invest in large- and mid-cap global stocks are also holding steady compared to what is unfolding on the leading U.S. benchmarks.
The iShares MSCI United Kingdom ETF, an index composed of British equities, is down just 2 percent this year. The iShares MSCI ACWI ex U.S. ETF, which offers exposure to Taiwan Semiconductor Manufacturing Co. Ltd., Nestle S.A., and Tencent Holdings Ltd., is down about 13 percent. The iShares S&P/TSX 60 Index ETF, which invests in the Royal Bank of Canada, Enbridge, Canadian National Railway, and Brookfield Asset Management, is down only 4 percent. The iShares MSCI ACWI ETF, extending investors access to Brazil, the Czech Republic, and Qatar, is down 17 percent.
Forward price-to-earnings (P/E) that measures forecasted earnings in the calculation also spotlights a contrast between the U.S. and foreign MSCI composites, notes Yardeni Research.
The MSCI USA Index (USD) has a forward P/E ratio of 17.0, compared to the MSCI UK All Cap Index (GBP) of 10.1.
This could be the beginning of European value stocks topping U.S. growth equities over the next decade, says Andrew Dickson the CIO of Albert Bridge Capital.
“Consequently, we are very much drawn by how attractive European value stocks are vs. U.S. growth stocks today, and this is where we are spending a lot of time combing for investment ideas,” he wrote, adding that European benchmarks are value-heavy and U.S. benchmarks are growth-heavy.
“So it stands to reason, or at least consider, that in a more normal market environment, Europe might have a lot of catching up to do—particularly some of the value stocks across the continent.”
Perhaps investors are seeing opportunities in Europe, too. In April, European ETFs enjoyed their 25th consecutive month of inflows, Vanguard data show. Equity ETFs received $11.3 billion in cash flows, while fixed-income ETF inflows totaled $4.3 billion.
What is the rationale behind global funds performing better than the United States?
The chief difference between U.S. and European markets has been monetary policy, says Komson Silapachai, a partner at Sage Advisory Services. The Federal Reserve has been aggressively hawkish to fight inflation, while the European Central Bank (ECB) only recently unveiled plans to increase the deposit rate from subzero territory to combat rampant price inflation.
“This differential in central bank policy stance is the main factor in the relative performance of European and U.S. equities which we think will revert over the next three months as the ECB begins raising its deposit rate,” Silapachai told The Epoch Times.
William Stack, a financial advisor at Stack Financial Services, agrees, telling The Epoch Times that the United States has been faster than Europe to hike rates.
Moreover, Stack purported that investment performance is typically correlated with cycles, so U.S. stocks compared to foreign equities have been due for a reversal.
“This is also true when considering U.S. vs foreign stocks, with 7.9 years being the average cycle length of U.S. stocks outperforming foreign, and vice versa. But the latest cycle of U.S. market outperformance lasted over 11 years, and was overdue for a reversal, historically speaking,” he said.
What Sectors Are Rallying?
But while it might appear that the entire financial market is in bear or near bear territory, there are a few sectors that are keeping investors’ decimated portfolios on life support, driven by soaring commodity prices and traders seeking shelter from the flood of red ink.
The energy industry is booming and many energy funds are doing remarkably well this year, despite the raging selloffs everywhere else.
Year-to-date, the Energy Select Sector SPDR Fund is up 47 percent, the iShares Global Energy ETF has rallied 40 percent, and the Vanguard Energy Index Fund ETF has soared 45 percent.
Stocks and funds that specialize in agricultural commodities, such as corn, soybeans, and wheat, have also done well in 2022.
The Invesco DB Agriculture Fund has added close to 13 percent year-to-date. The iShares MSCI Global Agriculture Producers ETF, which has positions in Nutrien, Mosaic, CF Industries Holdings, and Deere, has picked up nearly 9 percent.
Utilities have also been on an exceptional run in 2022, with the S&P 500 Utilities subsector outperforming the broader S&P 500 group for much of the year. The subsector, offering investors an escape from the overall market volatility, has edged up more than 2 percent.
The iShares U.S. Utilities ETF has climbed 2.5 percent on the year. This fund gives shareholders access to Nextera Energy, Duke Energy, Southern, Dominion Energy, and Waste Management.
What might be surprising to some is that most of the precious metals have failed to join the broader commodities bull run this year. Aside from gold, which is up more than 2 percent, the metals market has slumped, such as copper (-2.9 percent), silver (-5.4 percent), and platinum (-1.8 percent).
Many analysts anticipate more mayhem in the financial markets for the rest of 2022. Investors will be searching for opportunities in an environment where some of the top-performing assets of the last two years are leading the market rout. Will energy and agriculture sustain their bull runs, or will growth stocks stage a comeback?
From The Epoch Times
