Charting the Markets: Looking at the Leadership of the Rally
Global developed stocks reached a new all-time high in November
This rising stock market tide hasn’t lifted all equity boats, however
US equities and growth stocks are really the only ones powering this rally
Global developed stocks, as measured by the MSCI World IMI Index, reached a new all-time high in November and are up more than 20% year to date—putting them on track to cap off one of their best years since 2013.1 But this rising global developed stock market tide has not lifted all equity boats.
The market’s run is being driven by a power surge from US equities, which have hit multiple all-time highs and outperformed non-US equities by more than 7% this year.2 Because US equities make up 61% of global developed stock market capitalization,3 leadership of this global stock market performance is narrow and heavily US-focused.
This narrowness is amplified when we broaden this market performance analysis to include emerging markets (“EM”) equities. When EM stocks are added, and global market performance is measured using the MSCI ACWI IMI Index instead of the MSCI World IMI Index, it shows that global stocks haven’t reached an all-time high in 485 days.
Aging all-time stock market highs
Now, 485 days since reaching an all-time high may sound like a long time. But for many non-US based markets, their last all-time highs occurred thousands—not hundreds—of days ago. As shown below, many of these markets are double-digit percentage points away from their most recent all-time highs. These downbeat returns are one reason why we consistently see a home country bias in our clients’ portfolios when conducting portfolio reviews.
This divergence in stock market returns, however, means non-US markets are more attractive than the US from a fundamental valuation perspective, perhaps indicating a 2020 contrarian investment opportunity. But this divergence existed at the start of 2019, and it did not sway investors to abandon their home county bias. While these underperforming regions may also offer potential portfolio diversification benefits, investors have not been able to look past the sizable geopolitical risk impairing fundamental and economic growth overseas and in EM.
The US is the outlier in all-time high performance, but the chart above shows that not all US stocks are running at full strength. At the end of November, US mid caps were 2% away from their last all-time high, reached in January of 2018, but US small caps were nearly 7% away from their previous all-time high. This small-cap lag underscores the deeper drawdowns that have hit the more domestically oriented small-cap market segments as a result of macro and trade risk driven microbursts of volatility. The closer to all-time-high nature of mid-caps when large-caps are at all-time highs, reinforces the points we made within our mid-cap research regarding the more attractive risk-return profile versus small-caps.
Growth is in style
From a style perspective, growth continues to outshine value. Value remains 4.9% and 481 days away from its last all-time high, while growth just hit an all-time high. Value has recorded multiple years of underperformance relative to growth and the broader market, and it remains mired in an unfavorable cyclical trend.
Dissecting the US by sectors also reveals a dichotomy between market leaders and laggards, as shown below. Growth sectors like Technology, Communication Services, and Consumer Discretionary have all hit all-time highs in 2019. In addition, defensive sectors like Utilities, Consumer Staples, and Real Estate have hit all-time highs as investors have sought out certain defensive, bond-proxy areas of the market given the low bond yields this year.
But Financials are lagging as they fail to fully recover from the financial crisis, while Energy has been bludgeoned by the expansion of renewable forms of energy and the Icarus-like fall of the spot price from all-time highs reached in 2014.4 Meanwhile, Materials are being hampered by trade uncertainty. All three of these sectors have a high weight in value strategies, weighing down value’s performance.
It’s lonely at the top
Out of the 505 stocks in the S&P 500® Index, only 48% have registered an all-time high this year.5 This isn’t surprising given that certain sectors are not near all-time highs either. What is surprising is that even within the sectors that are at all-time highs, there are large portions of companies within these sectors that are nowhere near all-time highs. The chart below shows Consumer Discretionary and Communication Services are two areas that fit this bill, along with Technology (35% of stocks in the sector have not hit an all-time in 2019).
Navigating a narrow market rally
With only one major region (the US), one style (growth), and less than 50% of stocks in that leading region registering an all-time high in 2019, it can be safely said that market leadership is narrow. Why does this matter? There are two sides to that coin. One side says there are more gains to be had as the rest of the market (global or US) catches up. The other side says the true strength of the rally is overstated, like the great and powerful Oz, and all it will take is a geopolitical risk flare-up or a growth scare to reveal what is behind this rally’s curtain. To strike a balance on this rally brick road, consider equity strategies that seek to limit the impact of any “volatility drag” on returns while retaining upside participation potential.
1 Bloomberg Finance L.P., based on the MSCI World IMI Index, as of 12/9/2019 2 Bloomberg Finance L.P., based on the MSCI World-EX US IMI Index and S&P 500 Index, as of 12/9/2019 3 Bloomberg Finance L.P., based on the MSCI World IMI Index, as of 12/9/2019 4 Bloomberg Finance L.P. as of 12/9/2019 5 While the S&P 500 includes 500 companies, some of those companies have dual share classes, resulting in the figure of 505.
MSCI ACWI IMI Index The MSCI ACWI Investable Market Index (IMI) captures large, mid and small cap representation across 23 Developed Markets (DM) and 26 Emerging Markets (EM) countries. With 9,072 constituents, the index is comprehensive, covering approximately 99% of the global equity investment opportunity set.
MSCI World IMI Index The MSCI World Investable Market Index (IMI) captures large, mid and small cap representation across 23 Developed Markets countries. With 6,002 constituents, the index is comprehensive, covering approximately 99% of the free float-adjusted market capitalization in each country.
Russell 2000 Index A benchmark covering 2,000 small- capitalization firms domiciled within the US.
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