U.S. Put a Pasting on Foreign Stocks in 2011

Crunching the numbers to predict the future

By Dan Wiener, Editor, The Independent Adviser for Vanguard Investors


Last Friday’s jobs report was a short-lived, optimistic view overshadowed, of course, by continued worries about the eurozone. That being said, Thursday’s better-than-expected bond rally in Europe — Italy in particular — took some of the sting out of continued concerns of recession, in part due to a recognized slowdown in Germany’s fourth quarter. In fact, with the Italian bond yield dropping well below 7%, Italian stocks were up over 2% for the day.

As I’ve discussed previously, 2011’s spread between the -12.1% return for the EAFE index and the 1% return for the Russell 3000 was the largest differential since 1997. When I last talked about this, I was looking at absolute numbers and, in a year, for instance, where returns might have been big across the board, a large difference would be less substantial overall. For example, the point spread in 1989 was almost 19 percentage points, making it the seventh-largest spread seen in over three decades. Yet, U.S. stocks were up 29% that year, and foreign markets were up over 10%. So, all the numbers were big.

However, it occurred to me that maybe there was another way to look at it, because 2011 just felt so divergent in its returns. What if you took the point spread between U.S. and foreign stocks and compared that back to the return of the U.S. market, creating a percentage differential? This puts 2011 into an even starker contrast that I imagined. In the current low-return environment, the spread between U.S. and foreign markets in 2011 was the second-largest divergence on a percentage basis in more than three decades — surpassed only by 1994 when U.S. markets returned just 0.2% and foreign markets returned 7.8%.

Yes, it was a wicked year where U.S. stocks, up a total of 1%, could reasonably have been said to have soared relative to the pasting delivered by foreign shares.

Since we’re talking numbers, and the first few trading days of the new year don’t hold much interest just yet, I’ve been looking at some technicals recently, not because I think they are good market-timing indicators, but because others do (falsely, I believe).

One of the most widely regarded technical signals is the 200-day moving average on the Dow. The reason some technicians love the Dow’s 200-day moving average as a core technical indicator is because, since 1900, a timer would have earned a return of, yes, 114,000%. Just buying the Dow and holding it would have yielded a 20,000% return. Now, before you go crazy over these numbers, that works out to an annualized return of 6.5% versus 4.9% — you have to love the power of compounding.

But how has the 200-day done lately? Not so good. Since the beginning of the lost decade and through last year’s end, tracking the moving average would have netted you a loss — while the Dow was actually up over the full 12-year period.

So, why am I even bothering to tell you this? Because the technicians are going to be jumping all over the fact that the Dow has now been steadily above the 200-day average, and by Monday, Feb. 13, the April 2011 high in the Dow will be out of the average, and the line is going to start shooting a lot higher and a lot faster.

Article printed from InvestorPlace Media, https://investorplace.com/2012/01/u-s-put-a-pasting-on-foreign-stocks-in-2011/.

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