Global Divergences, Challenging Cycles, Fragile Trends, Selective Allocation
The most powerful influence on equity performance this year has been the global divergence of growth between the US and the rest of the world. As highlighted a few months ago, http://chrisbelchamber.com/q1-2018-performance-review-markets-in-transition/, international economies shifted to declining growth at the end of 2017, and yet US growth has powered ahead so far in 2018.
The chart above shows the significant impact this growth divergence is having on equity index selection. While global ex US equities, VEU, has just made a new YTD low, down 4.4%, the most domestically concentrated US equity index, IWM, continues to rally, and is now up almost 10%!
The Dow Jones Index, has a very substantial overseas earnings component so it is splitting the difference, and closed yesterday marginally down YTD.
These international downcycles are still at an early stage.
Looking ahead the international downcycles look like they are only just beginning. Indeed, it looks like Europe entirely missed raising rates at all, even from negative interest rates, in the upcycle last year.
Japan and Emerging markets also look like they are in challenging phases of their respective downcycles.
Globally, the US has remained a standout by hanging on to its growth uptrend in Q2 2018, and rapid profits growth.
However, peak growth has likely only been marginally delayed. Credit spreads continue to diverge from the S&P500 Index.
The yield curve has also continued to suggest that the US economic cycle is very mature, as yield curve flattening approaches historical turning point levels.
The corporate yield curve has already inverted.
https://www.zerohedge.com/news/2018-06-19/corporate-yield-curve-has-just-inverted
Record buybacks have supported US equities, but executives have been selling into the rally in record amounts. So presumably executives are buying with corporate cash while at the same time as they are selling for their own account. Are they doing the right thing for both the corporation AND their own account?
http://money.cnn.com/2018/06/11/investing/stock-buybacks-sec-report/index.html