Rising Interest Rates: A Review of Domestic vs. International Equity Performance

International markets, however, exhibit a different behavior than U.S. equity markets. International equity market excess returns, on average, are 7.79% lower during U.S. accommodative monetary policy regimes.

Related: International Portfolios – How Thoughtful Diversification Can Reap Benefits

The results above show that there may be an opportunity for investors to benefit from monetary policy shifts by timely reallocating financial resources between domestic and international equity markets. Using history as a guide, investors could earn annualized excess returns of 10.42% by investing internationally during U.S. contractionary monetary policy regimes (vs. 3.72% in U.S. equity markets) and earn annualized excess returns of 8.28% by investing domestically during U.S. accommodative monetary policy regimes (vs. 2.63% in international equity markets).


The study’s results are robust to a variety of methodology changes. For example, marginal changes to the thresholds used to identify rising and falling interest rate environments, shorter sample periods, and alternative equity and fixed income markets benchmarks don’t qualitatively alter the study findings.

As an additional robustness check we introduced noise in the algorithm used to identify interest rate environments. Particularly, we allowed for a +/- 3 and 6 month window of misidentification, which is equivalent to modeling an investor being “too early” or “too late” to realize a monetary policy regime change.

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Table 2 displays the difference in returns between U.S. and international equity markets during contractionary and accommodative U.S. monetary regimes. From the table, it is clear that introducing a window of misidentification does not invalidate the results of the paper.

In other words, investors could still take advantage of monetary regime shifts to allocate their resources between domestic and international equity markets even when they are not accurate in identifying the precise time when those regime changes occur.


In this study we showed that US equity markets outperform international equity markets during U.S. accomodative monetary policy regimes. Additionally, international equity markets outperform U.S. equity markets during U.S. contractionary monetary policy regimes. Considering the current state of our economy, investors may be facing a unique opportunity to benefit from the purported monetary policy shifts by timely reallocating financial resources between domestic and international equity markets.

This article was written by Dr. Vito Sciaraffia, Chief Investment Officer, and Aaron Steinman, Research Analyst, at Innealta Capital, a participant in the ETF Strategist Channel.


The information provided comes from independent sources believed reliable, but accuracy is not guaranteed and has not been independently verified. Any security information, portfolio management or tactical decision process are opinions of Innealta Capital (Innealta), a division of AFAM Capital, Inc. and the performance results of such opinions are subject to risks and uncertainties. For more information about AFAM Capital, Inc.  visit afamcapital.com.

The MSCI All Country World Index Ex-U.S. is a market-capitalization-weighted index designed to provide a broad measure of stock performance throughout the world, with the exception of U.S.-based companies. It includes both developed and emerging markets. The S&P 500 is an American stock market capitalization-weighted index that tracks the 500 most widely held stocks on the New York Stock Exchange or NASDAQ. It seeks to represent the domestic stock market by reflecting the risk and return of all large cap companies.
AFAM Capital, Inc. is an investment adviser, registered with the Securities & Exchange Commission and notice filed in Texas, California, and various other states. For more information,  visit afamcapital.com. Registration as an investment advisor does not imply any certain level of skill or training. Innealta is an asset manager specializing in the active management of portfolios of ETFs.