Weekly Market Trends

As Markets See-Saw, Look Outside US for Opportunity

US markets continued their up-and-down rhythm once again. And while valuations are at a 20-year low, earnings sentiment is stronger in international developed markets than in the US.1 Exposure to the region — with an ESG lens — may warrant consideration.

Senior Research Strategist

This article was written with contributions from Federico Burroni, CFA. Federico is a Research Analyst on the SPDR Americas Research Team.

The S&P 500® Index closed the week down -4.7%, continuing its see-saw trend. As the hotter-than-expected August CPI lifted investors’ expectation of more monetary tightening, the 10-year and 2-year yields both jumped up, further inverting the yield curve — a sign of weak economic growth prospects.

Inflation Surprises Even as Sentiment Rises in the US

August’s US Consumer Price Index (CPI) print was higher than expected both month-over-month (MoM) and year-over-year (YoY), coming in at 0.1% versus -0.1% and 8.3% versus 8.1%, respectively.2 Producer Price Index (PPI) fell 0.1% in August, in line with expectations, increasing 8.7% YoY.3

Preliminary data shows a slight increase in the Consumer Sentiment Index, which has gone from 58.2 in August to 59.5 in September.4

This week, the Federal Reserve (Fed) met and, as expected, hiked rates by another 75 bps as it continues to try to tame inflation.5 It will also share the updated Summary of Economic Projections, which should provide insight into forecasts for interest rates and inflation trends.

The current interest rate for a 30-year fixed-rate mortgage surpassed 6%, the highest level since 2008 — and more than double what it was just a year ago (2.86%).6

Inflation Continues to Climb Across the Globe

Japan’s core CPI inflation accelerated to 2.9% in August — its fastest year-over-year change in nearly eight years.7

Meanwhile, annual inflation in the eurozone hit 9.1% in August, up from 8.9 % in July.8 It was pushed higher largely by rising energy prices, which registered their highest annual inflation rate at 38.6%.9

In the UK, the Bank of England will meet on Thursday to discuss what’s likely to be a 50 bps rate hike. This would bring the bank rate to 2.25%.

Look Outside US for Opportunity

International developed markets have shown stronger earnings sentiment than the US market since the beginning of Q3. 2022 earnings-per-share (EPS) growth estimates for international developed markets were upgraded to 21% from 18%, while S&P 500 growth estimates were downgraded to 7.5%.10 This increase has come despite hawkishness from global central banks and the continuing energy crisis.

Yet valuations for international developed markets relative to the US are at a 20-year low (see chart below), as investors have shown pessimism toward the region. This may provide an attractive entry point for investors looking to diversify away from more growth-tilted US large-cap exposures.

Valuations for International Markets at a 20-year Low

weekly market trends

Implementation Idea: SPDR Bloomberg SASB Developed Market Ex US ESG Select ETF (RDMX)

Investors looking to add exposure to international developed markets that also have favorable ESG characteristics and compelling relative valuations, may want to look at the SPDR® Bloomberg SASB Developed Markets Ex US ESG Select ETF (RDMX).

RDMX is designed to maximize exposure to companies that exhibit certain ESG traits, while avoiding those that could be more prone to ESG-related controversies. It aims to do this while maintaining a similar risk and return profile to broad international developed markets.

All funds in the Morningstar Foreign Large-cap Core category have posted losses of at least 7.73% year to date.11 And 93% of those funds have higher expense ratios than RDMX.12 So investors may also want to consider RDMX as a potential tax-loss swap for international developed exposures, for tax and cost efficiency.

RDMX Standard Performance as of June 30, 2022

RDMX  Standard Performance as of June 30, 2022

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