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.