Is This Year's Leadership In Foreign Stocks Fading?

Global equities ex-US, represented by the Vanguard Total International ETF (VXUS), have delivered a robust 24.1% year-to-date return through September 9th, significantly outpacing the S&P 500's 11.6% gain. However, this strong international outperformance peaked in mid-April, with US stocks subsequently regaining leadership and outperforming since then, indicating a recent shift in market momentum despite the continued year-to-date lead for foreign shares.

Analysis

Global equities ex-US have demonstrated substantial outperformance year-to-date, with the Vanguard Total International ETF (VXUS) posting a 24.1% return through September 9th, significantly outpacing the 11.6% gain from the SPDR S&P 500 ETF (SPY). This validates strategies that have tilted portfolios internationally throughout the year. However, a critical inflection point appears to have occurred in mid-April, after which the leadership dynamic reversed. Since that time, US stocks have outperformed their foreign counterparts, suggesting the strong international theme may be losing momentum despite its impressive year-to-date headline figure. This shift from international to US leadership in recent months presents a key tactical consideration, moving the market narrative from one of clear international dominance to a more contested and nuanced environment, as reflected by the mixed overall sentiment score.

Key Decisions for Investors

• Investors heavily allocated to global ex-US equities should closely monitor the recent trend of US market outperformance since mid-April, as it may signal a sustained leadership change.
• Consider trimming profits on international positions, such as VXUS, that have seen significant year-to-date gains to manage risk associated with the observed momentum decay.
• Tactical asset allocators could view the recent strength in US equities as an opportunity to increase exposure to domestic markets to capitalize on the current shift in relative performance.