Relentless. The S&P 500 eked out a bit more this week making just a little progress each day. The difference in return between large cap US equities relative to smaller capitalization and non-US equities continues to astound. As of Thursday, November 13th, the difference between year-to-date returns of large cap (S&P 500) versus small cap (Russell 2000) in the US is roughly 9%. Even more, the difference between US (S&P 500) and the rest of the world (MSCI ACWI ex-US) is 13.5%. What makes the outperformance of the US over the rest of the world even more remarkable is that it has persisted for so many years. On a trailing 5 year basis, the difference is almost 10% each and every year! Sooner or later the valuation gap will become too great for the stronger relative economic recovery in the US to overcome, but in the near-term we are maintaining our overweight to US equity relative to global equity comparisons as capital flows remain supportive.
Meanwhile, the news headline shooting across my cell phone this morning sounded hopeful – Eurozone GDP surprises to the upside! Unfortunately, the headline is another example of typical journalistic bombast. Even a cursory glance through the article showed that the “surprise” was 0.2% growth versus an expected 0.1%. Forgive us for thinking that there’s not much difference between the two – both feel awful. In addition, the last weekly reading showed the ECB balance sheet SHRANK by €22bln. Does somebody need to tell them that is going the wrong way? Despite the bond purchases made thus far, banks continue to repay prior loans causing some of the problem. It is not uncommon for fluctuation week-to-week, but the credibility issue is going to gain steam fast if the shrinking trend continues despite jawboning about expansion.