Is the S&P 500's Strength in Global Equities an FX Advantage?
- The S&P 500 stands at record highs while many of its global counterparts are well off their own highs
- Germany's DAX is 17% off and UK's FTSE 100 is down 6% from their record highs, Japan's Nikkei is 21% off 20yr highs
- Aside from FX influence, key considerations for disparity in performance can be growth, yield forecasts, speculation
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The S&P 500 has consolidated these past weeks at record highs. Its international counterparts are significantly lower than respective historical or generational highs. While some disparity in performance is to be expected, the contrast between US and the international equities performance is remarkable given the globalization of the markets and the ready transmission of speculative appetites through boarders and asset boundaries.
One of the first considerations to come to mind is that the US stock benchmarks benefit from a strong local currency. However, when we adjust the global indexes to exchange rate influence (back to the Dollar) there is limited support for this this assessment. With the exception of the UK's FTSE 100 seeing an incredible adjustment to the Brexit fallout that drove the Pound over 12 percent lower versus the Dollar in a span of two days; the standings change little. That leaves other explanations that are less quantitative and likely share responsibility.
Relative growth potential, current yield, expected future yield, favorable regulation, structural rehabilitation, stronger business cycle and revenues are the traditional sources of relative strength we would attribute this skew. While that may contribute to relative value; the fact that the market stands at record highs when US economic conditions don't measure up to its own historical performance levels suggests there is a more prominent - if errant - factor. A combination of risk appetite and the world's devolving into competitive monetary policy likely accounts for the bulk of the S&P 500's strength. But, those make for an unstable foundation. We discuss this global market contrast in today's Strategy Video.
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