U.S. stocks experienced a bull run through 2014, but after trading sideways for much of 2015, it seems that this trend may now be reversing in a big way. (A disappointing Empire State manufacturing index reading this morning isn’t helping.) In July alone, some $20.4 billion flowed out of U.S. equities, bringing the net total in 2015 to about $79 billion leaving domestic equities, the largest such flight of funds out of U.S. stocks since 1993. Overall, U.S. indices are lagging behind their international counterparts this year.
Breaking Down U.S. Shares
After a fairly robust start to the year, U.S. stocks have wallowed in mediocrity ever since. Even with the uptick in exchange-traded fund (ETF) inflows during 2015, the massive outflows from mutual funds is outweighing any positive movement from this trend.
Both the S&P 500 and the Dow Jones Industrial Average are part of the New York Stock Exchange (NYSE), the world’s largest stock market. Because only 30 companies make up the Dow Industrials, the index itself is pulled more heavily by movement in each individual listing (although they are price-weighted). So far this year, the Dow has fallen from its high of 18,351.36 back down to about 17,500, a drop of more than 4.6%. The DJIA seems to have lost its momentum from last winter, treading along flat throughout 2015.
Over the same time span, the Standard & Poor’s 500 has only been slightly better. Although the index has gained roughly 1.5% thus far in 2015, this performance looks far less impressive relative to stock indices located around the world: on average, major exchanges abroad have risen about 6% this year, according to the MSCI developed equities benchmark.
As a stark comparison, Japan’s benchmark Nikkei 225 index has risen better than 17.5% since the calendar turned to 2015. If nothing else, investors have found that their money would’ve yielded a far better return if they had sunk those funds into international shares than into the NYSE. As a much larger index, with 500 components compared to the Dow Jones’ 30, many believe that the S&P also gives a more accurate picture of U.S. equities, while the Dow is more representative of the very top tier. The other major U.S. index, the Nasdaq Composite, has actually surged ahead of the pack at +6.8% thanks almost entirely to a series of mergers between the largest players in healthcare and health insurance.
Same Story in Europe?
European shares saw their worst weekly performance out of the last six even as the Greek debt situation began to inch toward a clearer resolution. The continent’s EURO STOXX 50 index started the year on a steep climb thanks to expectations that the European Central Bank’s quantitative easing measures would help reflate the eurozone economy. This hope remains tenuously intact after months of crisis relating to Greece’s insurmountable debt load, but equities aren’t buying the hype: the ESTX 50 has suffered an 8.75% slide from its all-time high in April.
The outlook for Europe remains slightly more optimistic, however. With the U.S. no longer engaging in aggressive QE and a weaker euro (and stronger dollar), investing in Europe is relatively cheaper compared to the U.S., making these shares a more attractive buy for traders.
There appears to be some consensus in the markets that the U.S. stock market is now finally exiting its bull run that began as the financial crisis of 2007-2008 faded into memory. Europe, on the other hand, was long in recovering from the crisis, and is only now beginning to emerge from the deep recession of the global crisis.
Based on these trends, many traders are more optimistic about the prospects of European shares than those in the U.S. Moreover, once the commodity cycle plays out and these assets recover, investment in emerging markets will also likely become more attractive. The broad picture for equities, however, may be less appealing: Many are citing the economic slowdown and currency fiasco in China as the spark that sets off a global stock crash. Time will tell whether or not these risks have such a dramatic effect in the U.S.