USA, USA, USA!

World ex-U.S. equity markets are in correction mode or in outright bear markets. Can the USA save the world?

Let’s drill world equity markets down:

• The MSCI World Index is down 5.4% from its January 26 high, sitting on its still rising 200 dma line, just about to be crossed by its declining 100 dma line:

MSCI WORLD INDEX

• Taking U.S. equities out, the ACWX is down 10.8%, in correction mode, with a declining 200 dma neatly crossed over by its falling 100 dma:

MSCI WORLD EX-USA

• The MSCI EAFE Index (Developed markets ex-USA and Canada) is down 9.8%, with similarly falling dmas:

MSCI EAFE INDEX

• The MSCI Europe is down 10.4%, in correction mode, with similarly falling dmas:

MSCI EUROPE

• The MSCI Japan Index is down 10.2%, in correction mode, with a flattening 200 dma just crossed downward by its 100 dma:

MSCI JAPAN

• The MSCI Emerging Markets is down 15.6%, bear threatening, with similarly negative dma trends:

MSCI EMERGING MARKETS

• The MSCI China Index is down 20.2%, the Panda Bear, with both dmas only recently turning down:

MSCI CHINA

Meanwhile in North America:

• The MSCI Canada Index is down 4.3% with a flat 200 dma and a recovering 100 dma trying to catch up:

MSCI CANADA

• But Canada’s official S&P/TSX Composite Index is unchanged YtD with smartly rising dmas, in spite of no tax reform and NAFTA uncertainties. Canada’s strong banks (Financials = 33.5% of the Index), higher oil prices (Energy = 20%) and some strong global Industrial and IT companies have carried the Index this year.

TSX COMPOSITE INDEX

• The MSCI USA Index is down 1.2% with nicely rising dmas:

MSCI USA

• While the S&P 500 Index is down only 0.7% with similarly rising dmas:

S&P 500 INDEX

• The S&P 500 Equal Weight Index is down 1.7% but displays strong dma trends as well:

S&P 500 EQUAL WEIGHT INDEX

• The very broad Wilshire 5000 Index is down 0.3% and also displays smartly rising dmas:

WILSHIRE 5000

Foreign investors are looking at the U.S. equity markets with both envy and bewilderment given its political show. So far, booming earnings and a strengthening economy are winning over anything else that might be viewed negatively. Add the rising USD and the attraction of U.S. equities could become irresistible given the bearish trends outside North America.

This could potentially provide another boost to U.S. equities and propel valuations into the “Extreme Risk” area.

That would further boost the dollar, adding to the headwinds faced by foreign borrowers, on top of the increasing trade issues already reducing the supply of dollars in the world, also contributing to the strength in the greenback.

This seems to be an untenable position for the U.S.: weak foreign demand for U.S. goods and services (weak economies and local currencies) coupled with rising U.S. imports (strong economy and currency) will aggravate the trade balance going into the mid-terms with the risk of another 1987 Baker tantrum (TRUMPISM: Déjà-vu!).

Speaking of mid-term elections, Charles Schwab’s Liz Ann Sonders had this comment and chart in her recent piece:

(…) midterm election years have been rough for stocks, with the average decline or “drawdown” being 17% in the S&P 500 since 1950, with much of the weakness clustered in the summer months. However, going from each of those midterm drawdowns’ troughs, the subsequent one-year performance was a strong 32%. History certainly doesn’t guarantee the future, but it does give us some reason for a bit of caution over the next couple of months. (LIZ ANN SONDERS)

FYI, the January-February 2018 drawdown was 11.8%. Was that it?  

Two charts on the seasonality of U.S. equity markets:

• This one graphically illustrates the August-October trends since 1992:

• Callum Thomas (topdown charts) has 55-year stats on monthly returns:

So, was that it last February?