Inside the Numbers:
Both stock indices continued to charge higher as they each finished at fresh new highs. The S&P was up 2.96%, while the Dow was up 2.17% on the week. Economic data was limited following the previous week’s releases of the June employment reports, which continued to show positives, though they continued to lack great strength.
Confidence remains high within the investor space. The Bloomberg consumer comfort reading continued to improve over the past week. The University of Michigan reading dropped slightly, but remains near levels last seen in late 2007.
Housing has pertinent data releases on tap this upcoming week, but we were very light in the space for the previous week. Mortgage applications fell less than the previous week’s reading as they declined only 4%.
Inflation data showed a slight jump in core readings due to the recent surge in commodity prices. The PPI core reading was up 2.5% year-over-year, which was up from the past reading showing a 1.7% year-over year increase. But if we were to exclude food and energy, we would see PPI up 1.7% year-over-year—the same level we saw during last month’s reading.
Manufacturing data was light for the past week as well. Import prices fell slightly on a month-over month basis, but they were up slightly on a year-over-year basis. We also saw wholesale inventories drop 0.5%, but wholesale sales were up 1.6% month-over-month.
Employment data took a breather after dominating the headlines a couple weeks back. Initial jobless claims unexpectedly ticked higher as they rose above the 350K level to 360K claims on the week. Caterpillar stole the limelight last week advancing 6.12%. Cisco and Bank of America followed closely behind as each of the stocks were up over 5.50%. With news coming out last week of another fire on a Boeing plane, speculations were heavy as to the viability of the ion batteries with the Boeing jets. This sent Boeing shares down 2.24% on the week (the worst Dow performer). Monday morning, it was declared that the ion batteries were not the root cause of the fire.
The 10-year yield reversed its recent trends after reaching fresh highs on July 5th. This past week the 10-year yield fell 16 basis points to end the week yielding 2.58%.
The Capital Course
(All data used within The Capital Course was provided by Ned Davis Research)
When looking at the equity markets, we tend, rightfully so, to focus on the major indices here in the U.S., the Dow and the S&P 500. By watching these indices this year, it has given everyone the assumption that stocks are going gangbusters everywhere, but in reality only U.S. and Japan stocks have seen these gangbuster returns.
The MSCI ACWI (ACWI) index is an all world index which is composed of 46 countries, 23 developed and 23 emerging market countries. It is a cap weighted index and this leads to greater allocation for the bigger countries, the U.S. included. As of the end of June, the country weighting breakout showed the U.S. and Japan as the heaviest allocations. The U.S. had a 48.6% weighting in the index, while Japan had an 8.2% weighting.
Given the fact that the two heaviest country weightings are in the best performing countries, we could also jump to the conclusion that the ACWI index is also doing very well this year. The MSCI U.S. index is up 17.69% (basically the same as the S&P). While the MSCI Japan index is up 21.76% (in U.S. Dollars) for the year. Not all the constituents within the country specific MSCI indexes will find themselves in the ACWI index, but it provides a good basis for analyzing the attribution of the returns within the ACWI index.
Thus, based on the returns from just the U.S. and Japan, they have contributed a positive 10.38% return to the ACWI index this year, based on the current country weightings. But the ACWI index is only up 8.98%, overall, through last Friday. This lags the U.S. markets’ return by nearly 9% and also means that the other 44 countries in the ACWI index are bringing down the contribution from its top two countries by almost 2%.
Why is this? Well one of the main reasons is due to the sharp decline so far this year within the emerging market space. The MSCI emerging market index is down 10.41%. If we look at some of the bigger players in the emerging market space (the BRIC countries), we see that (all in U.S. Dollars) the MSCI Brazil index is down 23.03%, Russia is down 8.79%, India is down 6.52% while China is down 12.24%.
When we look at some of the other large country constituents (UK, Canada and France), we see that their performance is also greatly lagging those of the U.S. and Japan. The MSCI UK index is up 3.03%; France is up 5.10% while Canada is down 3.74%. What this shows is that diversification outside the U.S. and Japan has caused drag on many portfolios this year. But that doesn’t tend to be the trend. Diversification is a good thing longer term.
Looking back to 2000, we have seen (in price appreciation) thru June 2013 that the S&P 500 is up 21.66% and the ACWI index is up 22.65%. Thus, these two major indices have similar return patterns over a longer term period. This means that given the recent dominance within domestic equities (and Japan), we may be able to find some value outside of our own borders within those countries lagging the recent returns here. Because of the longer term trend for the S&P and ACWI to trade at similar levels and given the current 9% or so difference in the two indices, it seems to be a short term dislocation which should eventually level out over time.
