Global Equities Due For A Pause, Spotting Pullback Opportunities In VT (NYSEARCA:VT)

The global growth outlook for 2024 is looking a bit better. S&P Global and the IMF concur with a recent update from economists at Goldman Sachs for stronger inflation-adjusted expansion over the coming 10-plus months. All else equal, that is bullish for global equities, but right now, many investors’ eyes are glued to rate-cut expectations. Should we see a growth acceleration around the world, then tighter monetary policy central banks could cast a cloud over both foreign and domestic equities.

I have a hold rating on the Vanguard Total World Stock Index Fund ETF (NYSEARCA:VT). I am concerned in the near-term regarding the valuation landscape compared to several months ago, while a bearish calendar stretch could open the door for a better buying opportunity over the coming weeks. Finally, I will detail why VT looks modestly vulnerable today. That being said, I own both US and ex-US index funds for the long term, and I assert that VT is a solid choice for investors with comparably long-term horizons.

Global Real GDP Growth Forecasts Turning More Sanguine

According to Vanguard, VT invests in both foreign and U.S. stocks, and it seeks to track the performance of the FTSE Global All Cap Index, which covers both well-established and still-developing markets. The ETF has high-growth potential, but also high risk, per the issuer, but can also serve as a solid long-term low-cost ETF for diversified investors.

I would point out that holding a mix of the Vanguard Total Stock Market ETF (VTI) and the Vanguard FTSE All-World Ex-US Index Fund ETF (VEU) can help concerning rebalancing return potential as well as tax benefits via VEU’s foreign tax credit opportunity when held in a taxable account.

But getting back to the market action, among the major themes for global investors and VT holders is the widening valuation gap between the US stock market and the ex-US index. Notice in the valuation view below from Yardeni Research that equities at home trade at more than 20 times forward earnings estimates, while non-US shares feature just 13 earnings multiple. Thus, for the long haul, I am sure to have a decent allocation to the ex-US index.

Ex-US Stocks Cheap, US Equities Becoming Increasingly Expensive

For now, though, global equities as a whole trade close to 18 times earnings. That’s not an egregious valuation by any means. What’s more, the trend appears to be higher on the price investors are willing to pay for an ETF like VT. Still, we are now approaching a full standard deviation to the expensive side. Moreover, higher global interest rates today make an 18 P/E not nearly as much of a bargain compared to, say, three years ago.

Global Stocks Trade Near 18 Times Forward Earnings Estimates

The good news? If we take the current P/E on VT or the iShares MSCI ACWI ETF (ACWI), then history suggests that we should expect a 9% subsequent return over the next 12 months. It is only when the earnings multiple rises above 21.5 that near-term returns begin to get materially pressured.

A 15 to 20 P/E Is Usually Not Something to Worry About

Something else I encourage investors to consider: The equal-weight version of VT (or ACWI) has underperformed the traditional cap-weighted version by an enormous margin since February of 2023. It’s a similar theme to what the US market on its own has experienced. Goldman Sachs commented on what they dubbed the “GRANOLAS” stocks in Europe – the ‘across the pond’ version of the Magnificent Seven.

I am intrigued by owning a smaller-cap version of VT, perhaps the Vanguard FTSE All-World ex-US Small-Cap Index Fund ETF (VSS) and the Vanguard Small-Cap Index Fund ETF (VB) to capitalize on this underperformance, should we see mean reversion over the coming quarters.

Mega-Cap Global Stocks Powering the Index Higher YoY

For active investors mulling over their global allocations, we must pay close attention to movements in the US Dollar Index (DXY). It has been in rally mode since late last year. Normally, that pressures dollar-denominated foreign markets (and is a relative boon to currency-hedged products like the WisdomTree Japan Hedged Equity ETF (DXJ) and the WisdomTree Europe Hedged Equity Fund (HEDJ).

If the DXY breaks out above the 105 level, then VT would likely come under considerable pressure.

US Dollar Index Rises in 2024, Key Spot at 105

Seasonally, now is a dicey period for VT, according to Seeking Alpha’s new Seasonality view. Late February through March has produced weak, even negative, total returns in the last 10 years.

Gains have then been seen from April through July, so timing an entry with prudence could prove to be a wise play now through the end of the first quarter.

VT: Somewhat Bearish Near-Term Seasonality

What I like about VT for the long haul, however, is that it has solid diversification. Just 23% of the allocation is in the Information Technology sector, and all 11 sectors are represented. The ETF has a more cyclical bent compared to the S&P 500’s rising growth exposure.

But you will still find the Mag 7 companies at the top of the holdings list: Microsoft (MSFT), Apple (AAPL), NVIDIA (NVDA), Amazon (AMZN), Alphabet (GOOGL), and Meta Platforms (META). Remarkably, no foreign stocks are in the top 10. VT yields just slightly more than the S&P 500 today.

VT: Diversified Sector Exposure, Top 10 Holdings are US Large Caps

The Technical Take

With a rising valuation, ample diversification, and cautious seasonals, VT’s momentum is actually quite strong. Take a look at the 5-year weekly line chart below – you’ll see that VT remains under its all-time high, while the US stock market has eclipsed its early 2022 peak. With an RSI figure near 70, there is the chance that the fund has hit technical overbought conditions, warranting a retreat after a stellar rally off the October 2023 low.

Where might we find support? Buying on a pullback to $100 – the weekly high close from July last year – could be the way to play it. Considering that both the near-term 50-day moving average and the long-term 200-day moving average are both positively sloped, the trend favors the bulls. Finally, if we plot an uptrend line from late 2022, we find possible selling pressure as VT closes in on its all-time high.

Overall, there are some signs that VT could at least pause its uptrend. Buying on a dip to $100 appears as a reasonable play as bearish seasonal trends get underway.

VT: Encroaching on All-Time Highs, Nearing Overbought Conditions

The Bottom Line

I have a hold rating on VT. It has underperformed the S&P 500 in the last year-plus and features a somewhat high valuation, all things considered. With sketchy seasonality in play, I expect a leveling off in the uptrend.