- Bonds are improving after years of losses from rising interest rates.
- International stocks are starting to lead after more than a decade of U.S. dominance.
- The U.S. dollar’s direction could determine whether that trend continues.
Alright - it’s Day-5, my last of the five issues this week, so I hope you’ve enjoyed it and hopefully even found a golden nugget here or there!
To wrap up my final day of the CMT Market Mosaic, I want to talk about bonds…
I spent a massive portion of 2022-25 often repeating in our newsletters, articles, screencasts, and podcasts that “bonds still suck.”
In fact, for almost three years, we barely had any exposure to the bond market, purely due to the fact that interest rates were going up (thanks to the Fed hikes), so it was inevitable that the bond market was going to get decimated… and it did.
U.S. 20-year Treasury bonds were down about -50% at one point, and as you can see in the table below, the aggregate bond index (AGG is the ticker) was down -17.2% during the 2022 bear market.
Today, things are getting better. We’ve had bond exposure in our clients’ portfolios for months, focusing on convertible bonds and international exposure, but there’s still a lot of improvement yet to come, especially as we await a new Fed Chairman this year.
While bonds have been improving for about a year now, international stocks have been behaving similarly.
For the first time in more than 15 years, overseas markets have been quietly starting to take the lead. The big question remains, “Is it going to stock this time?”
As you can see below, the U.S. markets have outperformed international stocks for the past 15 years, and if I took this chart back further, you’d see that international has had its butt kicked since pretty much The Great Recesion.
However, after almost two decades of U.S. dominance in the stock market, we’ve been re-allocating our model portfolios slowly over the pond, and if this trend continues, there’s a chance we could see our models load up on mostly overseas equities, with very little domestic stocks to speak of.
All that being said, if international stocks are going to defend their position in the lead, a lot is going to hang on what the US Dollar does over the next few (or even several) months.
As you can see below, the USD had an impressive run in 2022, followed by a correction and subsequent period of choppiness and lack of any real direction or trend.
Last year, however, the Dollar broke down below a former floor of technical support, which has now become a potential overhead ceiling of resistance (and it’s been struggling to crack through that ceiling).
Bottom line, if the ceiling holds and the Dollar continues to trend downward, this will create a tailwind for international stocks.
On the other hand, if the dollar can break out above that potential ceiling of resistance and hold there - or even climb higher - then we could end up with this period of domestic under-performance being relatively short-lived.
As always, I love the opportunity to share my analysis and educate readers, so thank you for taking the time to tune in… and if you like what you’ve read this week, I hope you’ll reach out for more information on what we send out on a regular basis!
Shared content and posted charts are intended to be used for informational and educational purposes only. CMT Association does not offer, and this information shall not be understood or construed as, financial advice or investment recommendations. The information provided is not a substitute for advice from an investment professional. CMT Association does not accept liability for any financial loss or damage our audience may incur.
