Are we going back to the 2000s?
International equities moved into correction territory last week, as the iShares MSCI ACWI ex US ETF (ACWX) fell more than 11% from its February 25th closing high through Friday, March 20th. Emerging markets (EEM) and developed markets (EFA) also dropped more than 10% from their respective highs over the past month. This deterioration marks the first correction for ACWX since the “Liberation Day”-induced decline that ended last April. While the catalysts behind these two drawdowns have been vastly different, the price action has been similar up to this point. It took ACWX 20 days to drop nearly 14% last year, while it has taken 23 days for the ETF to fall 11% this year. Aside from last year, the current decline is the fastest 10% drop for ACWX among the past 12 corrections, dating back to 2012.
There have been 47 total corrections for the broad international benchmark ACWX since the end of 1987. Comparatively, there have been only 29 such corrections for the S&P 500 Index (SPX) over the same time frame, highlighting the heightened volatility we typically see in foreign stocks. This context is important when international equities still sit at the top of our DALI asset class rankings. Even though we have seen sharp declines, we also saw sharp appreciation from most representatives heading into their recent peaks. ACWX rose to show a weekly overbought/oversold (OBOS) reading north of 100% at the beginning of February and essentially stayed in overbought territory for the entire month. The default chart of ACWX ascended in a single column from last April through this past February, notching the largest X column in the fund’s history at 26 consecutive X’s. Put plainly, international equities had gotten frothy. This correction could be exactly what this historically volatile asset class needs to normalize before further improvement.
Corrections never feel good in the moment, particularly when they happen at the speed we’ve experienced over the past few weeks. It may also be confusing to see such sharp declines in the asset class that just moved back to the top position in our DALI rankings. A historical view of past corrections helps put the frequency of declines by decade into perspective, as shown in the graph below. The number of pullbacks in each decade is higher than what we would see in U.S. stocks. For comparison, the S&P 500 experienced six corrections in the 1990s, 11 in the 2000s, six in the 2010s, and six so far in the 2020s. The 2000s saw the most outperformance from international equities in recent memory, as ACWX outpaced SPX in seven of those 10 years. That decade also saw significantly more corrections, with 16 total events.
I have heard many comparisons between the current environment and the 2000s over the past few months, both in markets and geopolitics. Those comparisons make sense to a degree. Focusing on markets, we are currently looking at back-to-back years of ACWX outpacing SPX for the first time since the 2000s. The U.S. dollar (DX/Y) still sits in a long-term downtrend, as it did in the 2000s, even with the recent appreciation. Crude oil (CL/) has exploded higher with volatile price action, again like the 2000s. We cannot know for sure whether these trends are in their early stages. The 2000s saw six straight years of outperformance from ACWX, from 2002 to 2007. This is why we use a process-based approach like our DALI asset class rankings to keep us focused on the areas with the highest relative strength. Even if we see long-term strength from foreign stocks, expect that strength to be paired with further volatility.
The turbulence in international equity markets has led to rotation in our NDW Country Index matrix rankings. Nearly all countries in the matrix have changed rank since the end of February, including 17 of the top 20. Taiwan and Brazil have been the biggest improvers within the top quartile, each gaining six spots to the 6th and 7th positions, respectively. Norway has been the largest improver overall, moving up 12 positions into the top half. These could be areas to consider for focused exposure within the top asset class.
