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International stocks are broadly outperforming this quarter, decoupling from the U.S. to an unusual extent, according to DataTrek Research.
“Non-US stocks have decoupled from domestic equities by a statistically unusual degree over the last 50 days,” said Nicholas Colas, co-founder of DataTrek, in a note Tuesday. This together with their outperformance may bode well for flows into international stocks heading into the second quarter, according to the note.
“Lower than average correlations and positive returns are often magnets for incremental institutional capital,” wrote Colas, “so we expect to see non-US stocks continue to outperform domestic stocks as we start Q2.”
The iShares MSCI ACWI ex U.S. ETF
ACWX,
which tracks global stocks outside the U.S., and the iShares MSCI EAFE ETF
EFA,
which focuses on developed-market stocks in Europe, Australia and the Far East, are outperforming the S&P 500 in 2023.
Shares of the iShares MSCI ACWI ex U.S. ETF have climbed 4.7% this year through Tuesday, while the iShares MSCI EAFE ETF has a larger gain of 5.9% over the same period, according to FactSet data. The SPDR S&P 500 ETF Trust
SPY,
has trailed with a year-to-date rise of 3.4%.
“Over any 50-trading day window since 2010, the average correlation of daily price returns” between the MSCI EAFE index and the S&P 500 is 0.84, according to the DataTrek note, which pegged their current correlation 0.72.
Emerging-market equities have a correlation to the S&P 500 over the last 50 days of 0.59, lower than the long-run average of 0.76, the note shows, citing the MSCI Emerging Market index.
Exchange-traded funds focused broadly on emerging markets are lagging this year in terms of performance through Tuesday.
The Vanguard FTSE Emerging Markets ETF
VWO,
is up 2.6% so far this quarter, while the iShares Core MSCI Emerging Markets ETF
IEMG,
has risen 3.2% over the same period, FactSet data show.
But looking at strategies within emerging markets, the Xtrackers Harvest CSI 300 China A-shares ETF
ASHR,
has gained 4.5% this year through Tuesday and the Freedom 100 Emerging Markets ETF
FRDM,
which excludes authoritarian regimes such as China, has a year-to-date gain of more than 5% over the same stretch.
With the first quarter close to wrapping up, U.S. markets appear to be expecting the Federal Reserve has finished with its hiking of interest rates to combat high inflation, according to DataTrek.
“Markets are once again thinking the Fed is done raising rates,” said Colas, pointing to the recent drop in two-year Treasury yields
TMUBMUSD02Y,
“As much as the recent sharp move lower in 2-year Treasury yields signals a higher level of conviction than prior declines that the Fed is well and truly done, markets have gotten this call dead wrong twice in the last 15 months,” he said. “Perhaps the third time will be the proverbial charm but, given the magnitude of the recent pullback in yields, there is little room for error on this point.”
Read: No rate hike in May? Traders in fed-funds futures put odds a pause in rate hike at 51.4%
Meanwhile, Wall Street analysts expect the first quarter will be the 2023 trough for S&P 500 earnings, according to the DataTrek note.
The S&P 500
SPX,
ended Tuesday down 0.2% at around 3,971, FactSet data show. That compares with its 52-week closing low of 3,577.03 on October 12, according to Dow Jones Market Data.
Read: Slumping U.S. stock market lags these international ETFs as 2022 comes to an end
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