Indiana Trust Wealth Management
Investment Advisory Services

by Clayton T. Bill, CFA
Vice President, Director of Investment Advisory Services

  • The US equity market, represented by the S&P 500 index, slipped 3% for the week ending December 9.
  • A weakening dollar led to strong foreign developed and emerging markets returns in November. The Euro Stoxx 50 index, an index of the fifty largest stocks in Europe by market capitalization, pulled ahead of the S&P 500 since the Russian invasion of the Ukraine.

Russia’s invasion of the Ukraine created major disruptions to the global economy, but nowhere was the impact felt more than Western Europe. Crude oil and natural gas prices surged, leading to soaring inflation in energy and food. European equity markets sold off and the euro and pound sterling weakened.

From Russia’s invasion date through September, the Euro Stoxx index, tracking the index of the 50 largest companies by market capitalization in Europe, was off over 25%, about double the loss of the US market’s S&P 500 index. Those returns are reflected in the below chart by their respective ETFs, the iShares Euro Stoxx 50 ETF “FEZ” and the S&P 500 ETF “SPY”. There was a lot of gloom in Europe with winter approaching.

Shockingly, a complete turnaround has occurred. European and US markets have both rallied since October, but dollar weakness has given an extra boost to European stocks such that they are now outperforming US stocks since the Russian invasion.

Source: Bespoke Investment Group, December 9, 2022
Source: Bespoke Investment Group, December 9, 2022

Global market index performance for the month of November was similarly strong. The MSCI EM, an Emerging Markets equity index that includes countries such as China and Brazil, and the MSCI EAFE, a Developed Markets index that includes Asia (notably Japan) along with Western Europe, both almost doubled the US’s Dow Jones Industrial Average (DJIA) and S&P 500 returns for the month:

Source: Invesco, returns for November 2022
Source: Invesco, returns for November 2022

The situation in Europe is unpredictable, but some of the gloom is lifting. Germany is racing to diversify its natural gas imports from Russia, turning toward liquefied natural gas (LNG). It normally takes about five years to install a LNG terminal. Germany has been able to build one in five months.[1] Berlin plans to install several more terminals next year.

Given recent developments, it appears that markets have stopped caring about the war in Ukraine. Stock markets have a way of showing what feels like casual indifference toward bleak current events. We described this attitude as “insouciance” in 2020 during the COVID pandemic. Stock market insouciance has returned in Europe.

It is too soon to say that November was an inflection point between US and international market returns going forward. However, the rapid reversal in fortune for international equities, occurring over a period of a few weeks, would have been practically impossible to time perfectly. It provides evidence for maintaining strategic allocations to international such that those positions are held prior to these types of market swings.

[1] “The Five Year Engineering Feat Germany Pulled Off in Months”, Georgi Kantchev, The Wall Street Journal, December 8, 2022

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