Monthly Brief July 2018 – Global Equity Market Breadth
July provided the fourth consecutive month of positive returns for US equity investors, in large part, fueled by generally strong second quarter earnings reports as many companies exceeded expectations. While this served as a catalyst for stock prices, many reports also offered cautionary comments regarding the potential impact of global trade issues on future earnings. For some months now, investors have weighed the political rhetoric on trade policy against broad economic strength across the globe, looking to discern where opportunities and risks may exist. To date, the catalysts of revenue and earnings growth have prevailed over concerns regarding future policy headwinds. And, concerns over rapidly rising interest rates have also moderated as long-term rates have come down from mid-May highs.
July also saw broad international equity indices join the US in advancing. But one notable exception has been China, whose equity market had been a leader since early 2016 but has struggled this year. While other markets have shown resiliency over trade policy, Chinese equity markets have struggled.
Along with trade policy, global central bank policy continues to be closely watched as many post-financial crisis policies are being adjusted. As central banks strive to normalize policy without derailing the global economic expansion, few precedents exist and the process will be a factor for investors to consider for some time.
CHART OF INTEREST – GLOBAL EQUITY MARKET BREADTH
Whenever the volatility of global equity markets picks up, rising investor angst is not far behind. Following the orderly market advance of 2017, the combination of increasingly choppy equity markets and unfamiliar political rhetoric has certainly left investors on edge and looking for clues as to what might derail this bull market. One helpful measure of market conditions is the analysis of how individual stocks within a market are faring, commonly referred to as “breadth”. Typically, a market advance is more likely to persist when a healthy percentage of stocks within the market are also moving higher. Breadth measures look inside the index to see how broadly supported the trend is by the stocks which make up the index.
One measure of assessing global breadth conditions is to analyze stock trends by examining when current prices are above a short-term average (50-day) and a long-term average (200-day). This approach has historically proven to be very helpful in discerning whether recent market volatility may be a warning sign of further trouble ahead. This chart looks at measures of short-term and long-term global equity market breadth within the MSCI All Country World Index, or “ACWI”. Not surprisingly, during this time period, the ACWI has historically fared best when both readings are in their top zones, exhibiting strong participation in rising markets. However, times when fewer than 35% of the index’s stocks are above their 50-day moving average and fewer than 45% are above their 200-day moving average have served as a warning of potential market declines. The current mixed message presented, as of July 31st, warns investors to be on alert while trends are in flux, but does provide some encouragement of a positive resolution as shorter-term breadth has improved following market weakness during the first quarter.
James Ferrin, CFA
Chief Investment Officer
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