Bob’s Journal

There has been quite a divergence between U.S. stock indexes and international indexes.

Leading up to the correction in early 2016, U.S. stocks were far ahead of stocks from most other countries. After the correction, overseas stocks surged ahead of their U.S. counterparts. Latin American stocks were particularly strong.

In the first part of 2017, U.S. stocks accelerated and most overseas markets kept up with them. But since the last half of 2017, U.S. stocks have surged well ahead of other markets. The performance gap between U.S. and foreign stocks in 2018 is large.

For the year to date, the S&P 500 (SPY) is up 9.51% and the Dow Jones Industrial Average (DIA) has returned 6.73%. U.S. smaller company stocks, as evidenced by the Russell 2000 (IWM), are doing even better with a return of 13.39%.

Meanwhile, the All-Country World Index, excluding U.S. stocks, (ACWX) is down 2.10% for the year to date. Some of that performance gap is due to the strength of the dollar. When currency fluctuations are hedged out, that benchmark is up a meager 0.06% so far in 2018 (HAWX).

Emerging markets are doing worse. The MSCI Emerging Markets ETF (EEM) is down 6.03% for the year to date. Latin American stocks (ILF) are down 8.27%, while Asian stocks (AIA) are down 3.32%. European stocks (IEV) are down only 0.94%, and Japanese stocks (EWJ) are down 1.66%.

Of course, returns for individual countries vary a great deal. China and Brazil are down about 20% each for the year. Mexico is up more than 5%, and India is about even.

The U.S. outperformance has been so strong that U.S. stocks now are more than 40% of the global market capitalization for the first time since 2005.

The main factor causing these return differences is growth. The United States is growing faster than most economies, and the gap has been increasing.

U.S. earnings growth also has been stronger than in most other countries. That’s partly due to the tax cuts enacted at the end of 2017.

The dollar has appreciated against most other currencies. Some currencies have been hit particularly hard, especially many emerging economy currencies. That boosts returns for U.S. investors. It also attracts more capital to U.S. markets, raising stock prices.

Political stability also is a factor. Several countries have had unexpected election results while others are in periods of political uncertainty.

In our Retirement Watch portfolios, we added international stock positions shortly after the correction ended in early 2016 and held them profitably. But through 2018, we’ve been changing our positions. Our lone international stock position now is WCM Focused International Growth (WCMRX). This fund is global, with about 11% of its positions in U.S. stocks and the rest in global companies. But it invests in growth companies that have global businesses. Their home countries have little influence on their revenues and earnings. It is up 1.40% in the last month and 4.31% in the last three months.

In the short-term, these trends could reverse. U.S. stocks have been on a run and are overbought according to most technical signals. In fact, overseas stocks are up sharply in the last week.

But longer-term, the trends still favor U.S. stocks until the fiscal effects of tax reform fade and the economy is overtaken by the Fed’s tighter monetary policy. A peak in the dollar also might mark a turning point for U.S. stocks. But we’re not at those points yet.

The Data

Personal income and consumer spending continue to increase at solid, steady levels. Income increased 0.3% for the month, compared to last month’s 0.4%. Wages and salaries were up 0.4%. Spending increased 0.4%, the same as last month. Most spending categories were higher, but slower vehicle sales restrained the headline figure.

The Fed’s preferred measure of inflation, the PCE Price Index, rose only 0.1% for the month, again the same as last month. It is up 2.3% over 12 months. The core PCE Price Index rose 0.2% for the month and 2.0% over 12 months.

House prices barely increased in the last month, according to the S&P Corelogic Case-Shiller House Price Index. Prices rose 0.1% for the month and are up 6.3% over 12 months. The 12-month growth peaked at 6.7% earlier in 2018.

Pending home sales tumbled, declining 0.7% for the month and 2.3% over 12 months.

Consumer Confidence, as measured by The Conference Board, shot higher to 133.4 from 127.9 last month. The consensus was for a decline. This is the highest reading since October 2000. There was a sharp drop in the already-low percentage of people who said jobs were hard to get and a solid increase in the percentage who are optimistic about future income.

Manufacturing still is doing well in the southwest region. The Dallas Fed Manufacturing Index was 30.9, compared to 32.3 last month. The production index component of the survey was steady at 29.3. The measures indicate strong growth, and components of the index were positive.

The Richmond Fed Manufacturing Index also was strong, rising to 24 from 20. All components of the index were higher and respondents reported being optimistic about the future.

The second estimate of second-quarter gross domestic product (GDP) growth surprised economists by rising to 4.2% from 4.1%. Most expected a slight decline in estimated GDP growth. Real consumer spending declined a little to 3.8% (from 4.0%), but nonresidential fixed investment and some other components increased. The GDP Price Index held steady at 3.0%.

New unemployment claims increased 3,000. The four-week average is the lowest since December 1969.

The Markets

The S&P 500 is up another 1.86% higher for the week ended with Wednesday’s close. The Dow Jones Industrial Average rose 1.61%. The Russell 2000 returned 0.77%. The All-Country World Index increased 1.91% and, excluding U.S. stocks, it returned 1.56%. Emerging market equities increased 1.89%.

Long-term treasuries declined 0.69% for the week. Investment-grade bonds fell 0.41%. Treasury Inflation-Protected Securities (TIPS) lost 0.17%. High-yield bonds increased 0.09%.

On the currency front, the dollar lost 0.40%.

Energy-based commodities rose 1.93% for the week. Broader-based commodities returned 0.43%, while gold added 0.87%.

Bob’s News & Updates

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