Historically, US and developed markets ex-US equities (gauged by the SP500 and EAFE European/Japanese stock index, respectively) have generally moved in unison. Starting about 2014, however, developed markets ex-US stalled while US equities continued to rally. This largely reflected the better performance of the US economy relative to the rest of the world at that time. But in a highly integrated world economy such divergent global asset price movements tend toward similarity again over time. Thus it is not surprising that since the world-wide pandemic and more recent Russian attack on Ukraine, they have again moved more in unison and are currently falling in response to higher inflation and interest rates – but with EAFE declining much more.
High inflation and rising short-term interest rates will continue to negatively impact global equity markets in the current uncertain environment. But given the greater vulnerability of foreign markets to geopolitical and economic risk US equities are likely to be less negatively impacted.
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