Global Equity Performance – What’s Driving the Divergence?

Posted on September 20, 2018 by Gemmer Asset

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It’s no secret the U.S. equity market has dominated in terms of performance this year.



What’s interesting is how we got here. As you can see above, both US and international markets were essentially flat at the end of April after a bit of a roller coaster in the 1st quarter. Then the divergence began. Here’s how the performance breaks down:



Over the last 4+ months, the US has gone from trailing by about -80bps to outperforming by +14.2%.


What’s behind the rest of the world lagging? Emerging markets (China in particular) have been a real drag. The table below shows how much each region/country has contributed towards the -3.9% return of the world ex-US index. For example, Emerging Markets are responsible for two-thirds of the -3.9% total return YTD, or -2.6%. The only positive contributor to speak of has been Japan, adding about 0.16% to the index’s performance.



There are two sides to this coin. What’s driving the outperformance of the S&P 500? While all sectors in the index have been positive contributors, its mainly a growth & technology story. From April 30th of this year through yesterday’s close, technology stocks alone are responsible for over 40% of the S&P 500’s return.



Combine healthcare with tech and you can account for nearly two thirds of the S&P’s performance during this period. The technology sector has also historically been much more volatile than the S&P as a whole. The Trailing 3-year standard deviation of the sector is 14%, while the S&P 500’s stands at 9.4%. Technology is also the largest weighting by far in the index (26% according to Bloomberg as of 9/19/18). What this means is that a large overweight to the S&P 500 means a large concentration is a handful of tech names. We’ve certainly seen this level of sector concentration in the past. The last time tech had this large of a weighting in the S&P 500 was in 2000.



This last point doesn’t mean to suggest that we’re in another tech bubble, or that some allocation to growthy stocks is a bad thing, only that concentration at these levels is a good reminder to remain diversified.




Diversification becomes increasingly important when valuations in one area become stretched and/or volatility increases. The former is certainly true today. U.S. valuations are stretched – both relative to other markets and its’s own history (in the chart below EA represents developed international and EM represents emerging markets).



While current valuations are generally poor predictors of short-term returns, they do have value in assessing longer-term expected returns. And for the average investor, having a long-term outlook on their portfolio is key – it prevents us from succumbing to our behavioral biases.  Research affiliates uses valuations as a key component in developing 10-year real return/risk expectations. Their chart below summarizes their findings.



While the above chart may lead you to dump everything into emerging markets, we simply view this type of data as a confirmation that being diversified across these asset classes is key. There is no “fat pitch” out there to hit at the moment. The U.S. is doing very well but is concentrated and expensive, the rest of the world is cheaper but has been lagging with no clear catalyst to change course in the short-term. What’s the most logical approach? Have a bit of both and don’t focus on the day-to-day.


To summarize, the U.S. has been knocking it out of the park performance wise. For the year, all of that outperformance has been over the last 4 months due in large part to technology stocks. Emerging markets have been dragging down the rest of the world but developed economies haven’t helped much either. Take caution in chasing performance, U.S. valuations are stretched and the S&P 500 is becoming more and more concentrated. Lastly, focus on the time horizon most important to your situation – which for most us should be measured in years not months.





Published by Gemmer Asset Management LLC The material presented (including all charts, graphs and statistics) is based on current public information that we consider reliable, but we do not represent it is accurate or complete, and it should not be relied on as such. The material is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. It does not constitute a personal recommendation or take into account the particular investment objective, financial situations, or needs of individual clients. Clients should consider whether any advice or recommendation in this material is suitable for their particular circumstances and, if appropriate, see professional advice, including tax advice. The price and value of investments referred to in this material and the income from them may fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Fluctuations in exchange rates could have adverse effects on the value or prices of, or income derive from, certain investments. No part of this material may be (i) copied, photocopied or duplicated in any form by any means or (ii) redistributed without the prior written consent of Gemmer Asset Management LLC (GAM). Any mutual fund performance presented in this material are used to illustrate opportunities within a diversified portfolio and do not represent the only mutual funds used in actual client portfolios. Any allocation models or statistics in this material are subject to change. GAM may change the funds utilized and/or the percentage weightings due to various circumstances. Please contact GAM, your advisor or financial representative for current inflation on allocation, account minimums and fees. Any major market indexes that are presented are unmanaged indexes or index-based mutual funds commonly used to measure the performance of the US and global stock/bond markets. These indexes have not necessarily been selected to represent an appropriate benchmark for the investment or model portfolio performance, but rather is disclosed to allow for comparison to that of well known, widely recognized indexes. The volatility of all indexes may be materially different from that of client portfolios. This material is presented for informational purposes. We maintain a list of all recommendations made in our allocation models for at least the previous 12 months. If you would like a complete listing of previous and current recommendations, please contact our office.


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