2022 is nearing a close and I’d like to take a brief moment to thank you for reading and following along with us through another year.

Not only did the market take us on a wild ride, but we’ve rebranded here at Avalon, and we’re looking to head into 2023 with our fresh new look and optimistic eyes.

Now, whether you’ve been following us for years or just recently joined, one thing you’ve surely heard me talk about before is Relative Strength.

It is the cornerstone of our investment approach and it speaks to the “strength” of one security “relative” to another. Once you’re fully tuned into Relative Strength, you begin to see a different narrative than what the financial media is pushing… 

According to them, as we conclude the year we’re heading into a recession based on economic indicators:

• Inverted yield curve
• High interest rates (falling home sales and discretionary spending)
• Global PMI has slipped below 50

It seems to be the most anticipated recession, ever.

So I get why some investors may feel trepidation when thinking about investing right now.

But when we look at the markets through the lens of Relative Strength, we begin to see a completely different narrative. 

I’ll show you what I mean…

The advantage of using a tool like Relative Strength is that it is not subjective. 

A security is either stronger or weaker than the security it is being compared to. That’s it – there are no shades of grey. 

For example, let’s take a look at foreign stocks.

The U.S. Dollar Index is up almost 10% year-to-date. At one point in September, it was up 18%. You would think this Dollar strength combined with an equity bear market would have crushed foreign equity ETFs priced in USD, right?

Not quite. The ratio has actually broken down.

The longer-term trendline (orange) has recently been broken as foreign stocks are beginning to perform better than U.S. stocks.

And look at this table that shows the relative YTD performance of various country equities vs. the S&P 500. The relative equity performance has deviated significantly from the corresponding currency performance.

Now, imagine you didn’t believe in Relative Strength and you only read the news… 

You might be led to believe Europe faced an energy crisis after Russia invaded Ukraine. It even had to reduce industrial output to ration its energy. You might think that VGK should be getting crushed. 

Think again.

China was in a strict Covid lockdown, with citizens under surveillance. The economy was near a standstill. So China should be underperforming the U.S., right? 

Maybe not. 

Meanwhile, this year’s aggressive rate hikes were supposed to cripple Canada, Australia, and China due to their giant housing bubbles and consumer debt levels.

But using Relative Strength we see that EWA is beginning to lead.

I like to take note when the price action is the opposite of what is supposed to happen.

U.S. stocks have dominated for the past 14 years, and they continue to be the focus for most investors and traders today, but foreign stocks are now showing Relative Strength despite facing currency and news headwinds.

As interest rates continue to rise, stocks with higher valuations tend to show greater sensitivity. The recent decision by the Fed and the ECB suggests that U.S. rates may have further to go on the upside. This will continue to pressure stocks.

But if we look at foreign markets, we can see that those markets present better valuations. 

We can easily conclude that foreign stocks, though not immune from the impact of rising rates and a slowing global economy, may perform better than U.S. stocks on a relative basis given their better valuation.  

So as investors consider their portfolio strategy as we head into the New Year, Relative Strength is signaling that one move may be to make a portfolio tilt to foreign stocks.   

Stay tuned for more on this, and be sure to keep us in mind as you make your New Years’ resolutions to invest better in 2023.