Global equities closing 2013 strong but country breadth deteriorating
Simon Ward
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The Santa rally finally arrived: global equities, as measured by the MSCI All Country World index in US dollars, were up by 1.2% from their end-November level as of Friday’s close, and only 4.9% below the all-time high reached in October 2007.
The recent advance, however, reflects gains in a decreasing number of markets. The chart shows the MSCI index together with a breadth measure derived by calculating the percentage of the 44 MSCI constituent countries that rise each week and smoothing this percentage using a 13-week moving average.
The breadth measure peaked in September, at a lower level than a previous high in February. It has failed to recover much recently despite the further rise in the World index.
A similar divergence between index performance and breadth occurred before the 2007-09 bear market and corrections in 2010 and 2011.
Declining country breadth may be a sign that liquidity conditions are deteriorating. Global six-month real narrow money expansion appears to have crossed beneath industrial output growth in November – a shortfall last existed in early 2011. With “excess” liquidity eliminated, price gains for particular assets may depend on diverting funds from other markets, which suffer corresponding weakness.
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Reader Comments (1)
Hi Simon, Happy New Year!
your research has been very insightful.
Based on my caculations of your posting, also based on OECD double lead indicators. The market is expected to peak an average of 5 months once the DL indicators turned. It made a peak in Sept13. In 2011, the lead of 6 months, and in 2012, the lead was 4 months. So we have an average of 5 months. So the market may peak as early as this month (Jan, 4 months), or latest around March14 (6 months). I would think this time round tha markets should correct, unlike early 2013. We had the full effects of OMT and QE3 back in 1H2013, so markets correction were rather shallow. But this time round, I am not so cheery on the markets, especially 1H 2014. Thanks!