U.S. UNDERPERFORMS FOREIGN STOCKS -- DECADE OF U.S. LEADERSHIP MAY BE ENDING -- VANGUARD FOREIGN STOCK ETF HITS TEN-YEAR HIGH -- EUROZONE SHARES ALSO BREAK OUT -- UK ISHARES BENEFIT FROM STRONGER POUND -- RISING EMERGING CURRENCIES BENEFIT EM STOCKS
U.S. STOCKS ARE GLOBAL UNDERACHIEVERS... Several of my previous messages have written about foreign stocks doing better than those in the U.S. this year. I'll come back to those foreign charts shortly. Chart 1, however, is designed to show how weak U.S. stocks have been relative to foreign markets. The solid line is a relative strength ratio of the S&P 500 divided by the Vanguard All-World ex-US ETF (VEU). [The VEU includes foreign developed and emerging markets]. The chart shows the ratio falling below its 2016 lows to the weakest level since 2015. That doesn't mean that U.S. stocks have fallen. They're just underperforming foreign stocks "on a relative basis". In fact, the S&P 500 has gained 7% since the start of the year. Foreign stocks, however, have doubled that performance (14%). To break things down even more, emerging markets are up 19% this year versus 13% for foreign developed markets. Europe is leading developed markets higher with a 2017 gain of 16%. Euzozone stocks are even stronger (18%). Asia is leading emerging markets higher (21%). Stronger foreign currencies are giving an additional tailwind to foreign stock ETFs.
(click to view a live version of this chart)
Chart 1
LONG-TERM TREND MAY BE SHIFTING AWAY FROM THE U.S. ... Chart 2 shows that the U.S. has lost market leadership before, and may be doing so again. The blue line is a relative strength ratio of the MSCI World (ex USA) Index divided by the S&P 500 going back to 1995. After leading the world higher during the 1990s, the U.S. underperformed between 1999 and 2008 (a falling ratio). The U.S. started outperforming in 2008 and did so until last year (rising ratio). The red line tracks the 14-month RSI line for the ratio. The downturn in the RSI in 1998 from overbought territory gave an early signal that U.S. leadership was ending. The rising RSI line broke a ten year down trendline in 2008, which coincided with a bottom in the US/ foreign stock ratio (up arrows). The U.S. did better than the rest of world from 2008 through 2016. Which brings us to the present. After spending 2016 in overbought territory, the 14-month RSI line has fallen to the lowest level in four years, and has broken its rising nine-year support line in the process (see circle). That suggests that the decade of U.S. leadership that started in 2008 has probably come to an end.
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Chart 2
VANGUARD ALL-WORLD EX-US ETF IS BREAKING OUT ... Another reason why money is flowing overseas is because foreign stocks are achieving upside breakouts. The weekly bars in Chart 3 show the Vanguard FTSE All-World ex US ETF (VEU) breaking through its 2014/2015 highs to reach the highest level in a decade. Like all foreign stock ETFs, the VEU is getting an additional lift from stronger foreign currencies. That includes Europe which is the biggest part of the VEU (44%).
(click to view a live version of this chart)
Chart 3
MSCI EUROZONE ETF HITS TEN-YEAR HIGH ... I've written about the upturn in the euzozone before, bit I'm coming back to it today because it's also achieving an upside breakout. The monthly bars in Chart 4 shows the MSCI Eurozone iShares (EZU) breaking through its 2014 high to reach the highest level since 2008. The EZU is doing slightly better than Europe in general because it includes only countries that use the Euro. Since the EZU is quoted in dollars, it's getting an additional lift from a 6% gain in the Euro versus the dollar this year. A 1% jump in the Euro to a six-month high today is also boosting eurozone stock ETFs.
(click to view a live version of this chart)
Chart 4
UK ISHARES ARE ALSO TURNING UP ... The weekly bars in Chart 5 show the United Kingdom iShares (EWU) rallying to a two-year high after breaking through a three year down trendline. Britain's FTSE index has already hit a record high. But that's in sterling terms. The FTSE benefited from a weak pound following last summer's Brexit vote. This year, however, a rising pound is allowing the EWU (which is quoted in a weaker U.S. dollar) to play catch up. And as I've explained before, the trend of the EWU better reflects the impact of British stocks for an American investor. And it's looking pretty good.
(click to view a live version of this chart)
Chart 5
EMERGING CURRENCIES ARE ALSO RISING... Not only are emerging market stocks doing better than the rest of the world this year. Their local stock ETFs are doing even better. That's the effect of stronger local currencies. The green line in Chart 6 shows the WisdomTree Emerging Currency ETF (CEW) rising to the highest level in nearly two years after bottoming early last year. The red line plots a ratio of Emerging Markets iShares (EEM) divided by the S&P 500. That ratio also bottomed early in 2016 and appears to be on the verge of a bullish breakout of its own. Rising EM currencies have two positive side-effects. Stronger local currencies boost EM stock profits for American investors. And EM stock ETFs quoted in dollars rise faster than their local stock benchmarks. An upside breakout in the EEM/SPX ratio would probably attract even more foreign money to the EEM.
