As a follow up to my previous blog on the relationship between the dollar and the market, I wanted to take a look at how the S&P has performed against international equity indexes over the past two decades (inspired by a comment I received that pointed out that the U.S. markets outperformed international stocks in the 90s, whereas the opposite occurred in this last decade, and hence money flowing into the outperforming countries may have boosted those currencies higher). If you missed my initial blog on the topic, in summary, the dollar used to be positively correlated to the market from about 1990-2000. However, we have been seeing an increasingly negative correlation between the two in the past ten years or so. The 2009-2010 correlation is about -0.42 and the trailing 60 day correlation lies at -0.93 (as of Oct. 27).
Below outlines the average 30 day change across several major world indexes.
click to enlarge
Click to enlarge
The outperformance of the S&P from 1990-2000 is fairly clear from the above data (the average 30 day change in the S&P of +1.94% was higher than that of the other world indexes). The break down of this earlier decade into 1990-1995 and 1995-2000 also shows that the S&P was strong vs. international stocks (although the break down shows there were a couple of indexes that performed similarly to the S&P during those years). The data for 2000-2010 does not show in a pronounced way that the S&P underperformed the world indexes, which was what I had hoped to find. The 2005-2010 period better illustrates the underperformance of the S&P (the average 30 day change in the S&P of +0.17% was lower than that of the other world indexes). Although the lagging performance of the U.S. market is not as defined as I’d like it to be, it is clear from the data that the S&P definitely gave up much of its relative strength from the 90s.
From this perspective, it seems pretty self explanatory that until we see the U.S. market start to outperform the world indexes in a more definitive way (like we in the 90s), the dollar and the market correlation will remain in negative territory. Perhaps we are already beginning to see the U.S. market catch up as the 2009-2010 data shows that the S&P is performing on par with the FTSE and Nikkei, outperforming the CAC and Shanghai, and only slightly behind the DAX and Hang Seng.