If you follow the news, you'd think the U.S. remains in quite a bit of trouble. However, with most broad U.S. equity indices hitting new all-time highs, either investors are idiots (possible, but doubtful) or the headlines are not telling the whole story (more likely).
To some extent, one could argue the success of U.S. stocks is due to a relative game of being the "prettier pig." The U.S. may have a number of serious issues needing resolution, but compared to the problems facing the rest of the world, we're doing just fine.
The chart above shows the S&P 500 vs. MSCI World ex-USA and as you can see, U.S. stocks have been leading the world for years now, not just in the last several months.
Going one step further, the case can be made that we're just in the early innings of a U.S. rebirth. The chart below shows the S&P 500/gold ratio, along with gold and the US dollar (USD).
The long-term monthly chart shows that this year the S&P 500/gold ratio finally broke through its downtrend, as represented by the 40-month moving average. The last time this happened was in the early 1990s. The RSI has confirmed this move with it rising well above 50. Note also the fairly high correlation between the S&P 500/gold ratio and the USD, with the USD in a gradual uptrend for a few years now, further indicating U.S. relative strength globally.
A rising S&P 500/gold ratio infers that investors are increasingly less concerned about, well, anything concerning, meaning they are preferring riskier assets (stocks) over a safe-haven asset like gold. Fear is subsiding and optimism is growing.
So could this be just the beginnings of a U.S.-led secular bull market? Based on the chart above, it peaked in 2000 and has been downhill ever since -- until recently. What we've observed so far is pretty textbook stuff: a rising market in the face of continued uncertainty and doubts. Such an environment is often the norm during the start of bull markets as prices climb the proverbial wall of worry. Typically what then happens is the market transitions into multiple-expansion mode, with prices rising ever higher on less needed earnings.
Again, all of this would be in accordance with the playbook and is often what happens with a rising S&P 500/gold ratio (multiple expansion occurring). But we'll see, I always say there are no guarantees and nothing repeats the past exactly.
I would also remind that the observations and charts above are monthly and longer-term. In the near-term, the stock market appears stretched and I've expected it to correct for a few weeks now -- wrong! It's a testament to the underlying demand for equities, however nothing goes up forever. Better to be prudent than gutsy. Stay tuned.