RISING DOLLAR IS CAUSING FOREIGN STOCKS TO UNDERPERFORM THE U.S -- BUT THE U.S. USUALLY DOES BETTER WHEN FOREIGN STOCKS ARE ALSO RISING -- THE VANGUARD EX-USA ETF IS TESTING ITS FEBRUARY LOW -- WHILE EMERGING MARKETS ISHARES TEST LONG-TERM SUPPORT LINES
DOLLAR HAS BIG IMPACT ON GLOBAL MONEY FLOWS ... The direction of the U.S dollar has a big impact on how U.S. stocks perform relative to foreign stocks. As a rule, a stronger dollar favors U.S. stocks, while a weak dollar favors foreign stocks. Chart 1 shows how that relationship has worked over the last 20 years. The blue line in Chart 1 is a "relative strength ratio" of the MSCI World (ex USA) Stock index divided by the S&P 500 since 1998. The green bars plot the U.S. Dollar Index. It seems clear that the two lines generally trend in opposite directions. The chart can almost be cut in half. A plunging dollar between 2002 and 2008 resulted in stronger foreign markets (a rising blue ratio line). Since the dollar bottomed during 2008 and started rising over the following decade, foreign stocks have underperformed (falling blue ratio). Those downturns in the ratio were generally most evident during upturns in the dollar over the last decade (see arrows).
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Chart 1
A MORE RECENT LOOK AT DOLLAR'S IMPACT ... Chart 2 gives a closer look at how dollar direction has impacted global money flows since the start of 2017. A drop in the Dollar Index (green line) during most of last year gave a boost to foreign stocks, which actually did better than the U.S. for much of that year (a rising blue ratio). A rising dollar during 2018, however, has weakened foreign stocks enough to push the foreign /U.S. stock ratio to a new low. Chart 3 shows that swing away from foreign stocks starting in April when the dollar started to rally. There's good and bad news in the stronger U.S. performance. The good news is that it favors U.S stocks. The bad news is weaker foreign stocks aren't necessarily good for U.S. stocks for very long. U.S. stocks usually do better when foreign stocks are rising along with them. Right now, they're not doing that.
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Chart 2
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Chart 3
PAST UPTURNS IN U.S. STOCKS WERE ACCOMPANIED BY RISING FOREIGN SHARES... Chart 4 compares the Vanguard All World ex-US (VEU) ETF (blue bars) to the S&P 500 (black bars) since 2008. The first thing that seems clear is that both usually trend in the same direction. After falling throughout 2008, they bottomed together in 2009, bottomed together again near the end of 2011, and again near the start of 2016. There may be lessons to be learned from those last two global corrections in 2011 and 2015 (see circles). First, both indexes corrected together during both years; secondly, foreign stocks lost more ground both times. From May 2011 to that October, the VEU lost -26%, while the SPX lost -17%. Both bottomed together in October of that year. From May 2015 to January 2016, the VEU lost -22% at its lowest point while the SPX lost -10%. There again, both turned up together in February 2016 to resume their uptrends. The lesson in both instances is that U.S. stocks needed help from foreign stocks to end their corrections (as they did during 2009). We now appear to be facing a similar situation.
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Chart 4
S&P 500 IS DOING BETTER THAN VEU... Chart 5 shows the S&P 500 pulling back slightly from its March peak near 2800, but still in an uptrend that started at the beginning of May. By contrast, Chart 6 shows the Vanguard All-World ex US ETF (VEU) testing potential chart support near its near February low (and trading well below its 200-day moving average). Since the February peak in both indexes, the VEU has lost -9% while the SPX is down less than -3%. That's a pretty big discrepancy between the two. If history is any guide, however, a rally in the U.S. market would be a lot stronger (and have more staying power) if and when it starts getting more support from foreign stock markets. That's especially true of emerging markets.
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Chart 5
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Chart 6
EMERGING MARKETS ISHARES ARE TESTING LONG-TERM SUPPORT LINES... Emerging markets have lost -17% this year versus a smaller loss of -7% in foreign developed markets. And their chart reflects that weak performance. Chart 7 shows the MSCI Emerging Markets iShares (EEM) having fallen below their February low to the lowest level in nine months. The EEM is also trading below its 200-day average (and its 50-day line has fallen below its 200-day). So it's not a pretty chart. But there may be some positive factors in play. One is that its 14-day RSI line (top box) is near oversold territory at 30 (see arrow). The weekly bars in Chart 8 show that the EEM is also testing a rising trendline drawn under its 2016 lows. That's the second thing worth watching. The third factor is shown in Chart 9 where the monthly bars show the EEM still trading above its peaks formed during 2011 and 2014 which could act as support levels (see horizontal trendlines). It may also be worth noting that the last two corrections in the EEM during 2011 and 2015 coincided with corrections in the U.S. And they both turned up together (see arrows). Which suggests that a rebound in emerging markets (or at least a period of stabilization) could help support a global rally here and the rest of the world.
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Chart 7
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Chart 8
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Chart 9
MSCI ALL COUNTRY WORLD INDEX STILL IN UPTREND... Chart 10 carries some encouraging news. It shows the MSCI All Country World Index iShares (ACWI) still trading well above its rising 200-day moving average. In addition, each trough since February has been higher than the previous one. Each peak since the start of April has also been higher than the previous one. That's the standard definition of an uptrend. The chart also shows the ACWI stalled just below its March peak. The overall look of the chart, however, looks more positive than negative. That's good news for the U.S. which is included in the ACWI. And the fact that the correlation between the ACWI and the S&P 500 is well over .90. In other words, they trend in the same direction the vast majority of the time. The ACWI is getting most of its lift from the U.S.; while weaker foreign stocks are holding it back. The global stock uptrend would look a lot stronger with more help from foreign shares. Weaker foreign markets have also been acting as a drag on U.S. stocks, especially large multinationals with more foreign exposure. Smaller stocks that are more domestic are doing a lot better.
