Internationals Vs. Domestics

Includes: ACWX, EFA, IVV, SPY, VOO, VT
by: Bespoke Investment Group

When looking at individual stocks, one factor that plays a considerable role in performance is the company's international revenue exposure. When the dollar is strong, companies that have a lot of domestic exposure will outperform companies with a high concentration of international revenues. When the dollar is falling, the opposite is generally true.

Using our International Revenues Database, we created two baskets of S&P 500 stocks based on the percentage of revenues they generate from domestic versus international sources. The first basket, comprised of "Internationals," contains S&P 500 stocks that generate more than half of their sales outside of the United States. The other basket ("Domestics") is comprised of stocks that generate all of their revenues in the United States.

The first chart below highlights the performance of each basket of stocks over the last year, while the second chart represents the spread between the performances of the Domestics versus the Internationals. When the line in the lower chart is rising, Domestics are outperforming Internationals and vice versa when the line is falling. Over the last year, the basket of Domestics has seen a gain of 14.6%, which is more than twice the return of the Internationals basket.

While the outperformance looks cut and dry in the top chart, we would note that there has been a dramatic shift in the fortunes of both baskets since the US Presidential election. From the Spring through the election, Domestics handily outperformed the Internationals as investors preferred the relative calm of the US economy versus the turbulence in Europe. Since the election, however, fears of political gridlock and its negative effects have caused the attractiveness of the US economy relative to the rest of the world to reverse. Fearing the worst case outcome, global investors have been shifting out of the US and into other markets. As a result, the Internationals basket has seen a gain of 6.24% since the Presidential election, which is nearly four times the gain of the Domestics basket (1.62%). Better economy or not, global investors remain leery over increasing exposure to US equities with the backdrop of a dysfunctional Washington.

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