A glimpse of how this could unfold, hinting at a possible rate hike in March in the minutes of the Federal Reserve meeting on Wednesday. Investors gave up on tech stocks, pushing the Nasdaq Composite Index to its worst loss since February. Futures pointed to further losses in tech stocks on Thursday.
The sell-off came after a gangbuster year for the US market. The win for US stocks was, by one gauge, the biggest since 1997. Including dividends, the MSCI USA Index posted a return of 27%. This is 19 percentage points higher than the total return on the MSCI Index, which tracks stocks in 49 developed and emerging markets, excluding the US, when measured in dollar terms.
Chinese stocks fell on the back of regulatory tightening on tech companies and asset sector concerns. As measured by MSCI, the market gave a return of minus 22% in dollars.
Europe outperformed, but for US-based investors, was held back by a weaker euro. Total returns on European stocks were almost level against US stocks in local currency terms. After converting to dollars, it decreased by 10 percentage points.
BNP Paribas Asset Management is preparing itself to take advantage of the revival in stocks outside the US tech sector. The Paris-based fund manager has allocated more money to small-cap US stocks and stocks in Europe and Japan.
Daniel Morris, the firm’s chief market strategist, said: “If we’re expecting US rates to rise, in particular, that on a relative basis, technology should be hindered.”
Investors and analysts say the direction of government-bond yields will help determine whether US markets move again this year. US stocks pulled away from European stocks early last summer after, among other factors, the delta wave of the coronavirus, dragging Treasury yields down.
By making bonds relatively more attractive than more speculative investments, rising interest rates drove away future stock prices of companies. The Fed has positioned itself to raise rates faster than other wealthy world central banks, which some investors and analysts say could boost yields in the US and punctuate technical valuations.
Andrew Sheets, chief cross-asset strategist at Morgan Stanley, sees Europe and Japan outperforming this year. “When investors look at those markets, they don’t see them as markets that should be punished if interest rates are high,” he said.
Real yields on 10-year Treasury notes, which factor in the impact of inflation on investor returns, ended 2021 almost unchanged. In 2018, MSCI’s gauge of US shares fell the last time they rose, but were lower than shares in Europe, Japan and China.
The US market has outperformed the rest of the world for four years in a row, and some investors say it will extend that streak to a fifth, despite the odds. Main reason: Tech companies like Apple Inc. and momentum stocks like Tesla Inc. that expand in the US are less visible species overseas.
When Apple crossed $3 trillion in market capitalization this week, it had nearly the same valuation as all the companies on London’s FTSE 100 combined.
“I think they can continue to outperform,” said Shep Perkins, chief investment officer for equities at Putnam Investments, a U.S. equities market. “Earnings underpinning fundamentals have been great. If earnings slow down materially it will be a different story.”
Although energy stocks performed the best on the S&P 500 in 2021, the sector has shrunk in the broader market and large tech companies led the year’s gains. “The huge megacap outpaced the S&P 500, and that helped drive the performance of the S&P 500,” Mr. Perkins said.
US investors stuck in domestic stocks were rewarded. According to FactSet, the Vanguard Group’s FTSE Europe ETF, which trades in New York and counts Nestle SA and ASML Holding NV among its largest holdings, rose 13% in 2021. The SPDR S&P 500 ETF is up 27%.
Ronald Temple, co-head of multiasset at Lazard Asset Management, said times are tough to invest in the US or convert overseas. Mr. Temple likes to look for high quality companies, or ones with high and increasing returns on capital. He finds more in the US, partly because of the country’s large tech sector.
“Since there are so many quality companies in America, you pay less for them,” said Mr. Temple.
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