Over the past several months, there has been one primary story in the global stock market: the U.S. has done very well, with major indexes rallying to records, while the rest of the world has done very badly, with some markets falling into bear territory.
This trend has raised a key question for investors: is this divergence sustainable? And if it isn’t, will it be resolved by international stocks recovering or the U.S. falling?
So far this year, the S&P 500 SPX, +0.00% has risen 9%, making it the best performer of the world’s major equity markets by far. The strength of the U.S. has helped keep the iShares MSCI ACWI ETF ACWI, -0.24% — an exchange-traded fund that tracks the global equity market — in positive territory for the year. It is up 3.2% in 2018; to compare, an ETF that tracks the global equity market while excluding the U.S. VEU, -0.69% is down 4.8%.
In contrast to 2017, when global stocks rose broadly in every month of the year, the synchronized global growth story has broken down in 2018, with the weakness spread across major regions. A major index of European shares is down 2.6% in 2018, while the Vanguard FTSE Emerging Markets ETF VWO, -0.63% has dropped 10%, and a major index of Chinese stocks has plunged about 25%.
The divergence between the U.S. and emerging-market stocks recently hit its most extreme level in 14 years. Vincent Deluard, global macro strategist at INTL FCStone, called the scale of the disparity between the U.S. and the rest of the world “incredible.”
Courtesy INTL FCStone
According to Morgan Stanley, the percentage of companies outperforming the all-world index — a proxy for the entire global equity market — is near historic lows. In the past, such extremes get corrected