Domestic equities and the S&P 500 have been some of the strongest areas of the market for some time, and while its strength still rings true, there’s one region that has shined even brighter recently. The “core” S&P 500 Index Funds group holds an average score of 4.88 in our Asset Class Group Scores Page, which is 7th of 134 groups, placing it in extremely strong territory at 96th percentile of all groups. However, four of the six groups ahead of the “core” are from some part of the Asia-Pacific region, with Emerging Markets Diversified and Contrarian Strategies being the other two groups ahead of the S&P 500. With the significant presence of the region among the top ranks, is the APAC region worth investing in, and if so, where?

At the very top of the Asset Class Group Scores page, Japan sits in first place with an excellent score of 5.37. The region has benefited from stabilizing inflation and the election of a new prime minister, whose expansionary fiscal policies have sparked “Takaichi trade.” optimism among the country’s investors. The JPMorgan BetaBuilders Japan ETF (BBJP) now holds a strong 5.69 fund score, in addition to a sharply positive score direction of 2.65. Furthermore, the fund holds both near- and long-term relative strength versus domestic equities (SPXEWI).

China has also been a standout region this year, with the group holding a 5.07 score for the third position within Asset Class Group Scores. The country has benefited from several rounds of stimulus this year, in addition to booming AI technology despite escalating tariffs from the US. The iShares MSCI China ETF (MCHI) holds a fund score of 5.65 after moving to a buy signal in May and then back to a positive trend in June. Like BBJP, MCHI also sits on an RS buy signal and columns of Xs versus the S&P 500 equal weight (SPXEWI), highlighting its relative strength versus domestic equities.  

Strength within APAC hasn’t been driven just by its two largest economies either. Other countries like South Korea, Vietnam, and Taiwan have seen notable improvement this year as well. The iShares MSCI South Korea ETF (EWY) and iShares MSCI Taiwan ETF (EWT) both sits on three consecutive buy signals and hold near-perfect fund scores above 5.50. However, EWY is in overbought territory with an OBOS reading north of 120%, so those looking to add should wait for consolidation or a pullback closer to support at $81. Meanwhile, the VanEck Vietnam ETF (VNM) holds a solid fund score of 4.95 and is on a potential pullback opportunity after reversing to the middle of the trading band, placing it in actionable territory. While domestic equities are still the strongest asset class within DALI, Asian-Pacific equities do present a compelling opportunity for those needing additional international exposure.

As we discussed in Monday’s feature article, CBUS 10YR SPREAD (CBUS10YRSPREAD), which measures the spread between high yield corporate bonds and US Treasures recently reversed into Xs, possibly indicating a declining appetite for credit risk. This is a worrying sign for high yield investors as widening spreads have the same effect as rising interested rates – falling bond prices. But it also has potential implications for equities. High yield spreads are often considered a barometer for the US economy (or at least economic sentiment). When investors are worried about the possibility of recession and by extension that borrowers (i.e., bond issuers) won’t be able to service their debt, they demand a higher return for the (perceived) increase in risk and high yield spreads widen. Conversely, when the economy is perceived as being strong, investors are more willing to lend and high yield spreads contract. In an extreme example, high yield spreads widened by more than 700 bps in March of 2020 amid fears of an economic collapse at the outset of the COVID-19 pandemic. Earlier this year, CBUS10YRSPREAD rose about 180 bps in March and April amid tariff worries.

Of course, the economy is not the stock market, but there is a strong relationship between the two. To see how US equities perform when high yield spreads are we widening we looked at the quarterly change of the CBUS 10 Year Spread (CBUS10YRSPREAD) for each quarter since Q2 1987 and compared it to the quarterly returns of the S&P 500 (SPX). What we found is that SPX performs significantly better in quarters when high yield spreads are narrowing, and that the magnitude of the change is also significant as SPX performed better in quarters when spreads narrowed significantly and worse when they widened by a large amount. The results are shown in the table below.

As you can see, SPX’s performance has been much better in quarters when high yield spreads have narrowed versus quarters when they have widened; the difference in performance also increased with the magnitude of the change in CBUS10YRSPREAD.

The practical implication of this relationship is that equity investors would be well-served to keep an eye on high yield spreads as widening spreads could signal trouble for stocks while narrowing spreads have historically been associated with positive returns. Another consequence of the relationship between high yield spreads and equities is that investors seeking safety and diversification from their fixed income allocations may want to limit their exposure to high yield bonds. High yield bond prices decline as spreads widen and, as we’ve seen, equities also tend to perform poorly during periods when spreads are widening. Therefore, investors with large high yield allocations are likely to see their bond portfolio decline at the same time as their equity exposure. The reversal up on CBUS10YRSPREAD's chart does not necessarily mean that the S&P will finish the quarter the red, but it is, but it does open up the possibility that we are seeing a risk-off shift in the market that may merit a bit more caution in our investment decision making. 

Daily Option Ideas for October 23, 2025