The S&P 500 closed strongly ahead of the weekend to extend the
advancing streak to the seventh week and nine of the past ten. Some
efforts to decompose the return since the bottom in 2009 finds that roughly
two-thirds can be explained by earnings growth and about a third to expansion
valuation (price-to-earnings).
Through last week, with about half of the S&P 500 having reported,
earnings are up about 8.4% on a 6.3% increase in sales. The Dow Jones
Stoxx 600 that reported have seen an 8% increase in profits. In Asia, 185
companies in the MSCI Asia Pacific Index that reported a 14% growth in
earnings.
Value investors bemoan the fact that after an eight-year bull market, the
value opportunities are understandably scarce. However, the outperformance of growth over value may not be
fully appreciated. We look at the Russell 1000 Growth Index and the
Russell 1000 Value Index. The spread between the two is now at its most
since the tech bubble in the late 1990s
and early 2000s. However, to put in perspective, consider that the spread
between the two indices is about a third of what where it peaked in
2000.
The correlation (percentage change, 60-day rolling basis) between most
currencies and the S&P 500 has broken down. The two currencies
for which a statistically significant relationship still appears to exist is
the yen (0.55) and the Swiss franc (0.43). The yen’s correlation is among
the most for the year (June 0.61). Indeed, it is at the upper end of a
two-year range. Still, we note that the correlation between the
dollar-yen exchange rate and the 10-year US Treasury yield (0.83) is just shy
of the record seen earlier this month touch higher.
The correlation between the dollar-franc and the S&P 500 is the
currently the highest of the year and is moving in on last year’s high near
0.46. The correlation between the Swiss franc and the 10-year US
yield is about 0.67 and represents a four-year high.
Among the G7 bourses, Italy is the best performer this year with an 18.3%
local return. Germany’s DAX edged ahead of the US today. The
DAX’s minor gain today, lift to 15.3% year-to-date. The Nikkei and
S&P 500 are neck-to-neck with a 15.15% rise. Canada’s market is the
worst performer in the G7 with less than a 5% gain year to date. The
outperformance of all the European markets and Japan is strictly a function of
local currency exposure. Completely unhedged, the Italian market is up
30% for dollar investors and the DAX is up more than 27%.
If the euro continues to weaken, it would not be surprising to see
either European exposures pared by dollar-based investors or currency hedge
ratios to be increased. Recall
that interest rate differentials are a key cost of a currency hedge in the
forward market, and with US rates well above euro interest rates, the dollar-based investor is paid to hedge euro (and yen) exposure. Note that the
three-month cross-currency swaps put the
dollar premium of 42-47 bp greater than the LIBOR spread.