Two “Data” items today:
Topic #1: The dollar and crude oil prices as proxies for investor confidence in the strength of global economic recovery. There is some interrelation here, of course: oil is pretty much only priced in dollars around the world. Still, the fundamentals for each asset class currently pivot more on the speed of worldwide reopening than how marginal shifts in currency markets affect global energy demand. Bottom line: we want to see a weaker dollar and higher oil prices to confirm that investors are moving capital out of the safe-haven dollar and markets see oil demand rising.
Here is a chart of the Fed’s Trade Weighted Dollar Index (black line, left axis) and WTI/Brent crude prices (blue/red lines, right axis). We prefer the former over the more commonly cited DXY Index because it includes important currency crosses like the dollar/yuan. We’ve used Friday closing oil prices to avoid the wonkiest prices from last year. The yellow area indicates the current US Pandemic Recession.
Three points about this graph:
First, note that the Trade Weighted Dollar Index (black line) has started to weaken again, visible as the dip at the far-right side of the chart. That’s only been the case since the start of April; the dollar had been rallying since the start of the year. On top of that, global oil prices (red/blue lines) have started to rise again in April – that uptick again just visible on the far-right part of the chart. Brent and WTI are up 6-8 percent this month, respectively.
Translation: the dollar and crude have seen the same sorts of fits and starts as various US equity sectors ever since the March 2020 bottom, but their current price action indicates a more positive global macro outlook.
Second, there is the fact that neither the dollar nor oil prices are back to their respective 2018 lows or highs. The Trade Weighted Dollar Index is still 4 percent higher than its January 2018 lows. WTI/Brent is still 14 – 28 percent below its 2018 highs.
Translation: there’s still room for both the dollar and oil prices to move before they fully reflect pre-pandemic global economic conditions.
Third, there are clear ties between the dollar/oil and global equities. Some 40 percent of S&P 500 revenues come from non-dollar sources. A weaker dollar boosts their value. Oil prices obviously inform the value of Energy stocks, but they’re also important to single-country stock indices such as MSCI United Kingdom. EWU is the symbol there, and it is 9 percent weighted to the Energy sector. The S&P 500’s Energy weighting is, by way of comparison, 2.6 percent.
Wrapping up: whenever equity markets are at all-time highs, as is the case with large cap US stocks, it’s tempting to think all the good news is discounted already. The dollar and oil price data shows that other large, liquid markets still see room for further upside as global growth accelerates. We continue to like US large caps, the Energy sector and the UK equity market.
Topic #2: April month-to-date performance across major asset classes and investment styles. With just 2 days left in the month and volatility on the wane, there shouldn’t be much change to these numbers over the balance of the month.
- MSCI All-World Equity Index: +5.0 pct
- MSCI All-World ex-US Equity Index: +4.1 pct
Takeaway: it isn’t just April where US stocks have been global equity market leadership. Year to date MSCI All-World is leading “ex-US” by 1.8 points. We continue to recommend a US overweight in global equity allocations.
- S&P 500: +5.3 pct
- S&P 500 Growth: +7.2 pct
- S&P 500 Value: +3.3 pct
Takeaway: large cap Growth played catch-up in April, but Value is still ahead for the year (14.0 pct vs. 9.3 pct).
- Russell 2000: +3.8 pct
- Russell 2000 Growth: +4.1 pct
- Russell 2000 Value: +3.1 pct
Takeaway: as we outlined yesterday in Markets, US small caps needed a breather after their historic 35 points of outperformance to the S&P for the 100 days ending mid-February. Their underperformance in April is part of that process but they’re still too pricey for us to recommend them.
- MSCI Emerging Markets: +3.3 pct
- MSCI China: +2.5 pct
- MSCI South Korea: +3.6 pct
- MSCI Taiwan: +8.6 pct
Takeaway: Emerging Markets, +6.6 pct YTD, aren’t keeping up with US stocks, and April’s return data is a microcosm of that problem. China, which is 38 pct of MSCI EM, is lagging badly (3.4 pct YTD). South Korea and Taiwan, 28 pct of EM and +8.0 pct and +22.6 pct YTD respectively, are doing much better. If you’re looking for EM exposure, we continue to like those countries. China is too mired in Big Tech regulation at present, in our view, to be a productive investment.
- MSCI EAFE (non-US developed economies): +4.2 pct
- MSCI Japan: -0.8 pct
- MSCI UK: +4.8 pct
- MSCI France: +7.8 pct
- MSCI Germany: +5.6 pct
Takeaway: MSCI EAFE had a good month, even if it did underperform US stocks. As with EM, this has been the pattern all year: +8.4 pct YTD for EAFE, +11.4 pct for the S&P and +16.7 pct for the Russell. As mentioned above, we like UK equities here.