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S&P 500 And MSCI EAFE Correlation

S&P 500 And MSCI EAFE Correlation

“Davidson” Submits:

Investing is not a simple process, BUT if one recognizes that once economic recovery begins all equity classes tend to rise together then one can make assumptions based on historical market behavior vs. the underlying economic trends. Basically, one can track economic trends and one can develop a sound basis for expecting higher stock prices based on historical market responses, BUT creating precise price and timing targets is virtually impossible. One can see this in the chart below of the S&P 500 (INDEXSP:.INX) vs. iShares MSCI EAFE Index Fund (ETF) (NYSEARCA:EFA) Indices.

Especially important is the June 2012 period where the iShares MSCI EAFE Index Fund (ETF) (NYSEARCA:EFA) retested the lows of March 2009, but the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) did not! The news in the US was simply better with many positive commentaries on the beginnings of Real Estate and Banking improvements which were not present in European news. The net result is the SP500 has climbed ~120% from the March 2009 lows while the EAFE has only risen ~78%. The persistent news on the Greek, Spanish, Italian and Portuguese Debt issues kept being recycled keeping European markets in check. Meanwhile prominent money managers like David Herro and Michael Hasenstab were investing heavily in selected areas and were telling the world in an active series of interviews at the time. Herro discussed investing in the banks (Europe Needs a Herro) while Hasenstab discussed investing in Irish & Polish Debt (Contrarian Bets Irish & Polish Debt) and etc. Since then the news in both the US and European economies has improved and one can see that the EAFE has been reaching new highs since October 2011.

Since June 2012, the EAFE has demonstrated a fairly strong trend. My recent recommendation to exit the REIT investments as overpriced was coupled with the recommendation to roll the funds to International LgCap as the more underpriced and less risky investment.

Markets rhyme rather than repeat exactly as one can see from fairly strong correlation between the S&P 500 (INDEXSP:.INX) vs. iShares MSCI EAFE Index Fund (ETF) (NYSEARCA:EFA) (LgCap Domestic vs. LgCap International). My expectation now that it is more obvious that the US is in a good recovery/economic expansion that many will come to recognize the correlation of US and European economies should be better reflected in their stock market performances. I expect the iShares MSCI EAFE Index Fund (ETF) (NYSEARCA:EFA) is likely to catch up to the S&P 500 (INDEXSP:.INX) as it has been doing since June 2012 and that portfolios should benefit from shifting the REIT funds to LgCap Intl asset class when we did.

Remember what we are doing is “Positioning” based on perceived Return/Risk and not trading. I still believe that the nascent recovery in the home building and commercial construction arenas are likely to carry our economic recovery another 4yrs-5yrs.

Capture695 S&P 500 & MSCI EAFE

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Todd Sullivan is a Massachusetts-based value investor and a General Partner in Rand Strategic Partners. He looks for investments he believes are selling for a discount to their intrinsic value given their current situation and future prospects. He holds them until that value is realized or the fundamentals change in a way that no longer support his thesis. His blog features his various ideas and commentary and he updates readers on their progress in a timely fashion. His commentary has been seen in the online versions of the Wall St. Journal, New York Times, CNN Money, Business Week, Crain’s NY, Kiplingers and other publications. He has also appeared on Fox Business News & Fox News and is a RealMoney.com contributor. His commentary on Starbucks during 2008 was recently quoted by its Founder Howard Schultz in his recent book “Onward”. In 2011 he was asked to present an investment idea at Bill Ackman’s “Harbor Investment Conference”.