by Mike O'Rourke, JonesTrading
For the past several years, the US financial markets have been described as the “best house in the bad neighborhood” of global investing. The strengthening Dollar, an extremely resilient Equity market and a Treasury market bubble all reinforced this thinking.
It is no secret that over the course of the past month since the US Presidential election, market expectations have shifted dramatically. The pre-election belief that a Trump victory would have been a disaster for financial markets was erased overnight, and replaced with expectations of pro-growth policies that increase spending while reducing taxes, regulation and global trade.
As such, it merits taking a snapshot of global equity markets and their relative performance versus the US equity market as investors prepare for the changing landscape. Due to the importance of currency moves in influencing returns, we have chosen to chart the relative performance of iShares of each respective country ETF’s (which don’t hedge currency) versus the SPDR S&P 500 (SPY).
There is a table below that lists the performance of the respective iShares ETF divided by the SPDR S&P 500 ETF over various periods of time. It is interpreted as being long the iShares and short the SPDR. There are charts below illustrating the relationships over the past 3 years. The black line is the year-over-year change in this relationship.
It is important to note the combined performances of the equities and currencies of other global markets has been abysmal relative to the US over the past 5 years. Most of these counties have experienced year in and year out compounding underperformance versus the US over that time. Over those years, currency weakness versus the Dollar was notable.
Many investors were concerned about...
... Federal Reserve tapering and then the normalization process, which has encountered fits and starts. What should be noted is that the downward momentum has faded in many cases, and while in many cases the year over year performance is still negative, it is an improving rate and in many cases, preparing to turn positive.
Of the 15 different country iShares we measured relative to the SPDR, 11 are outperforming the US over the past couple of weeks. One has to consider that after 5 years of underperformance relative to the US on a combined equity and currency basis, the new confidence investors have in the US growth and the monetary policy outlook (normalization resuming) is prompting investors to go bargain hunting overseas.
Bottom Line
The “flight to safety” trade of hiding in the US equity market may be starting to unwind here. While that does not necessarily mean that US equities need to drop, we would expect capital flows to broaden out into other markets. This should slow or reverse the strength of the very narrow global leadership that has been highly focused on the US.
Editor's Note
This is a Hedgeye Guest Contributor note written by Mike O'Rourke. Mike is the Chief Market Strategist at JonesTrading where he advises institutional investors on market developments. This piece does not necessarily reflect the opinion of Hedgeye.
