First off, I do expect a more severe correction in June and July than what we’ve seen at any point in 2013. There, it’s off my chest, and I can get on to discussing the American leadership perch.
With Japan’s drastic fall in the past 3 weeks, the U.S. market is now the best major stock market in 2013, in U.S. dollar terms. The S&P 500 is up 14.4% in 2013, outpacing markets throughout Europe and Asia (and the large majority of emerging markets, with a few small exceptions).
In the long-term, the U.S. outperformance is a vote of confidence in American companies and growth vs. the rest of the world, and my strong dollar thesis has some of that flavor baked in as well. In the short-term though, the illustrious Mark Dow put it well on Twitter after Friday’s selloff:
Today’s price action makes me uncomfortable with any poistion–long or short–that has been popular/performing well of late.
#treeshaking
Therein lies the short-term risk for U.S. markets. As the leader this year, U.S. stocks have attracted a good bit of hot money flow in the past few months. Hot money is also the first to leave, so on a position shakeout, the U.S. could get hit disproportionately hard. It’s also why I’m of the opinion (and positioned accordingly) that defensives will re-assume their outperformance this summer vs. the cyclical rotation that seemed so fierce in May.
Some perspective, though. Here is the chart of the S&P 500 over the last 3 years (with 200 day ma in black):
Compare that to the SX5E in Europe:
Or the MSCI Emerging Markets Index:
Or even Japan, whose recent roaring rally still has not led to a better 3 year percentage performance than the SPX over that same period:
Put it all together, and you have a picture of continued U.S. strength. But be mindful of your timeframe, whatever it may be. Might be time for some summer position cleansing since spring cleaning never arrived.