Wednesday, August 7, 2013

U-S-A! U-S-A!

In early May, I wrote about the strength of the U.S. stock market versus the rest of the world and that despite our enduring struggles economically, we continue to do quite well in a relative sense. I posited, "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."

And as shown in the charts below, U.S. stocks have been enjoying an extended relative run:

S&P 500 vs. MSCI EAFE
S&P 500 vs. MSCI Emerging Markets
S&P 500 vs. MSCI World ex-U.S.
S&P 500 vs. Shanghai Composite

Granted, relative performance for U.S. stocks has been stretched far above most trend lines, inferring consolidation or even retracement is overdue. However, longer-term relative returns remain in a solid uptrend.

What factors will disrupt or break this favorable trend for U.S. equities? I would argue that one worth keeping an eye on is the strength of the U.S. dollar.

Source: Bloomberg

The chart above shows the U.S. dollar (DXY, upper inset) and the S&P 500 vs. FTSE All World ex-U.S. (lower inset). Clearly the relative strength of the S&P 500 appears to be correlated with the trend in the U.S. dollar. As long as the USD remains in an uptrend, it bodes well for the continued global outperformance of U.S. equities.


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