Global Stock Market Review: The nine-year bull market is narrowing. Last year, the US S&P 500 index rose an impressive 19%.Other markets were just about as competitive. Japan’s Nikkei 225 Average was up about the same amount while Germany’s Xetra Dax climbed 13 per cent and the FTSE 100 rose 8 per cent. Emerging Market Equities managed to beat the S&P handsomely.
In 2018, the S&P has so far done well again. It has come through a period of increased volatility, is retesting its January highs and has risen a healthy 6 per cent this year. But other markets have fallen by the wayside.The Nikkei, FTSE 100 and Dax have given up all their 2018 gains. EM equities are now down 15% from their peak. Being underweight their S&P has generally been a mistake in this market cycle.
Some of the US outperformance can be attributed to strong corporate earnings. Earnings per share for the S&P 500 are expected to rise 20 per cent in 2018. This compared to 12 per cent growth for non-US stock markets. Much of the overall difference can be attributed to the benefits of US corporate tax cuts.
Valuations for US equities look increasingly stretched with the S&P trading on 18 times expected 2018 Earnings Per Share compared with the rest of the world on 14.The value gap keeps getting wider as the bull market narrows. This is similar to previous market cycles where global stock leadership also concentrated into fewer, increasingly expensive trades.
The late 1980s bull market narrowed into Japanese equities. In the late 1990s it was technology, media and telecom (TMT) stocks. In the last cycle, EM-related equities kept ploughing ahead even as other markets started to crack.
History suggests that the leadership of the stock market does not rotate into the laggards late in the cycle – bull markets don’t broaden. Instead, investors chase the leaders even harder, narrowing bull markets further. This time round, US equities look like the obvious beneficiary. This is making life difficult for value investors, however it still looks like it is better to be overweight US stocks within a global equity portfolio and the Nasdaq technology stocks in particular.
Value investors will eventually have their day but it could be a long career- threatening wait.
Equities
S&P 500: 2826
Nasdaq: 7834
FTSE 100: 7642
Bonds – 10 Year Government Yields
US 2.88%
EU 0.31%
GB 1.30%
Foreign Exchange
EUR/USD 1.1400 (1 euro buys 1.1400 dollars)
GBP/USD 1.2800 (1 pound buys 1.2800 dollars)
Commodities
OIL: Brent: 71.00 (dollars per barrel)
GOLD: 1215 (dollars per ounce)
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