Tale of the Tape: Equity Investors More Concerned About Rising Inflation Than Slowing Growth

We calculate statistics for all developed and emerging equity markets around the world. For our mid/large cap indexes, we take the top 85% of all stocks in a given region or country and convert all prices into US Dollars. These Knowledge Leaders Selection Universe (KLSU) Indexes form the basis of our investment products. By calculating our own statistics, we gain a more intimate relationship with the granular detail of global equity markets.

There are some major technical divergences occurring underneath the surface of the developed world equity markets. These divergences relate to the performance of the largest companies vs. the performance of the average company. We calculate market-cap weighted price indexes to see the market through the lens of standard benchmarks like the S&P 500 or MSCI World Index. We also calculate equal-weight price indexes, where the impact of every stock is equal. Sometimes, these series diverge, offering some insights into sector leadership trends. In general, we find that equal-weight indexes provide better insight into opportunities for portfolio alpha since they reflect more accurately how the majority of stocks are performing. We prefer to invest in areas where the majority of stocks are outperforming so our chances of selecting an outperforming stock is higher (i.e., the “hit rate”). There are several divergences to note that contain information content about asset allocation.

Our KLSU America market-cap weight index is breaking out to new highs relative to our KLSU All Country World Index. But, our KLSU Americas equal-weight index peaked at the end of 2014 and has been making lower highs and lower lows for three years now. While the average stock peaked years ago and is struggling recently, the largest companies continue to see share prices rise. This is a pretty good signal that relative leadership is shifting away from the US.

On the other hand, our KLSU Asia Index market-cap weight is making new decade lows while our equal-weight index has outperformed global equities by about 5% since the end of 2014. This is the opposite situation as above, where the average stock has been doing well while the largest companies struggle. This is a pretty good sign that relative leadership is shifting to developed Asia (Japan, Australia, Singapore, New Zealand).