The S&P 500 is up 17% year to date to new all-time highs. But U.S. investors who focus only on domestic stocks are missing out on enhanced performance and diversification over the long term.

"We do see investors have a home country bias," Jim Ross, senior managing director and global head of ETFs for State Street Global Adivsor's SPDR ETFs, said on a recent Charles Schwab conference call.

Investors have been too focused on U.S. stocks because they have been doing so well, at least for now - U.S. markets are up 17% year-to-date, compared to the 7% of other developed markets and the relatively flat performance in the emerging markets.

• SPDR S&P 500 ETF (SPY): up 16.6% year-to-date
• Vanguard MSCI EAFE ETF (VEA): up 10.3% year-to-date
• iShares MSCI Emerging Markets Index Fund (EEM): down 2.5% year-to-date.

Nevertheless, Ross suggests investors should "diversify away from your home"

The U.S. Federal Reserve has a unique window of opportunity, but it may only last for a limited time. It can begin tapering its aggressive monetary stimulus program without decimating the stock market averages it seems to value so much. By acting now instead of waiting until later, the Fed may actually increase the probability that the recent stock market rally can sustain itself into the longer term instead of completely falling apart like it already has several times in the past when the Fed has stepped away. In fact, the more aggressively the Fed tapers now, the more likely it may succeed in the end. Why? The Bank of Japan is now effectively doing the Fed's dirty work.

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Thus far, the Fed's QE3 stimulus program has clearly achieved the goals of boosting stock prices (SPY) with the hopes of creating a wealth effect while also keeping

Japan's stock market is on a roll, largely because expectations have dramatically changed this year about the underlying state of macro for the planet's third-largest economy. The iShares MSCI Japan Index ETF (EWJ) is up a potent 24% year-to-date. That's a substantial premium over the 18% gain for US stocks (SPDR S&P 500 (SPY)), for instance. An aggressive new round of monetary and fiscal stimulus that's weakened the yen and revived animal spirits explains most of the rally. So-called Abenomics seems to be working. Is Japan's two-decade stretch of disappointing economic performance finally at an end? Possibly, although a few months of improvement vs. 20 years of stagnation is hardly definitive proof. But let's leave all that aside and consider the larger point of relevance for investing, namely: the surprise factor.

How many investors anticipated Japan's return to glory? Surely there are a few brilliant (lucky?) ones out there.

"Abenomics" helped kick start Japan's economy, boosting the country's gross domestic product above expectations. However, Japan exchange traded funds cooled on Thursday.

The WisdomTree Japan Hedged Equity Fund (DXJ) and db X-trackers MSCI Japan Hedged Equity Fund (DBJP) were both 1.1% lower Thursday.

Japan's economy expanded at an annual rate of 3.5% in the first quarter of the year, outpacing the 2.7% analyst projections, on greater consumer spending and exports, Bloomberg reports.

The positive data reveals that the reform efforts spearheaded by Prime Minister Shinzo Abe are working.

"'Abenomics' first report card did not disappoint," Izumi Devalier, an economist at HSBC, said in a CNNMoney article. "The Japanese economy is beginning to fire on all cylinders."

"This is undoubtedly very strong growth, and very positive for Japan's economy," Yoshiki Shinke, senior economist, Dai-Ichi Life Research Institute, said in a Reuters article. "It's no longer

One of the big challenges facing the global economy is the shortage of safe assets. These are the highly liquid, information-insensitive assets that function as money. The financial crisis raised the demand for these safe assets just as many of them were disappearing. This cyclically-driven safe asset shortage (or excess money demand) that emerged continues to this day and is why aggregate demand in many countries remain depressed. (1)

The figure below illustrates this problem for the United States. It shows the Gorton et. al. (2012) safe assets measure along with the amount of safe assets needed to hit the pre-crisis trend growth path for NGDP as well as the CBO's full-employment level of NGDP. (2) It shows an ongoing gap that is preventing a robust recovery from occurring.

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The big question, then, is how to restore an adequate supply of safe assets. Given the

The complete set of U.S. economic indicators for March is finally in, so let's take a look at how the U.S. economy performed.

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The spring swoon in the economy arrived early this year helped by a double whammy of payroll tax increases and the enactment of the sequester on March 1, 2013. There is some good news, but mostly bad news. Let's start with employment. The unemployment rate continues to go steadily down helped by positive employment numbers, however, job creation was not up to par for the season. Both non-farm payrolls, private payrolls and ADP employment registered weaker numbers compared with the prior month and the prior year. They are positive so the overall effect on the economy is positive, however, they reflect a job market that is stuck in steady-as-she-goes mode and is far away from generating the 250,000 jobs per month that are necessary

It's been another strong year for the U.S. markets in 2013 thus far (as we had forecasted after the first few weeks of the year). But many international single country exchange traded funds are lagging, and are even actually down on the year. Only one big country name is outperforming the S&P 500 (SPX) (SPY) … Japan (EWJ).

Take a look at the relative performance data below:

International ETF Performance Chart
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(chart from TradeStation)

While iShares Japan Index and the SPYders are up double digits this year, 10 major single country ETFs that have option trading and average volume over 100k per day are actually in negative territory on the year:

iShares Canada Index (EWC)
iShares Italy Index (EWI)
iShares Chile Market (ECH)
WisdomTree India Earnings (EPI)
iShares China Index (FXI)
MarketVectors Russia (RSX)
iShares South Africa Index (EZA)

Note from dshort: With the Nikkei 225 breaking the 15,000 level, I decided to refresh the charts in this commentary. The index is up 88.0% from its November 2011 interim low. After months of discussion and press speculation, last month the Bank of Japan disclosed its radical redo of monetary policy. The index is up 22.1% since the day before the unveiling on April 4th.

What about Japanese government bonds? The closing yield on the day the Nikkei hit its interim low on November 25, 2011 was 1.53%. While the index is up 85.0%, the 10-year yield is now at 0.84%.

See also this guest contribution from Mish Shedlock on the recent rise in the 10-year yield.

Here's a quick review of the Nikkei 225, the 10-year bond and inflation over the past few decades.

(click to enlarge)
The table below documents the advances and declines and the

Japan reported a stronger than expected Q1 GDP expansion, confirming it was the fastest growing economy in the G7. Separately, the Ministry of Finance reported the third consecutive weekly net purchases of foreign bonds.

Japan reported that the world's third largest economy grew at an annualized rate of 3.5%, faster than the 2.7% expected and follows the recent upwardly revised (due to a technical error) 1% pace in the final quarter of 2012. The quarterly pace was 0.9%, rather than the consensus forecast of 0.7% and 0.3% in Q4 12.

Consumer spending and exports were the main contributors to GDP. The former alone accounted for 2.3 percentage points of growth and the latter, 0.4 percentage points. Business investment was the weakest since the tsunami and private non-residential investment 0.3 percentage points from growth, while inventories took 0.8%.

While growth offered an upside surprise, the GDP deflator was a downside surprise.

Below is a list of 2013 and quarter-to-date stock market returns for 77 countries around the world. Of the 77 countries shown, 60 are in the green for the year, while 17 are in the red. As shown, Japan is now up the most of any country with a YTD gain of 45.22%. Japan is already up 21.76% in the second quarter as well. This gain of 21.76% for Japan doesn't even rank it first for the second quarter, however. Greece is actually doing the best of any country in the second quarter with a gain of 28.13%. Dubai ranks second for the quarter with a gain of 25%.

On the downside, Peru has been the worst country so far this year with a decline of 15.73%. The Ukraine ranks second to last with a decline of 10.44%, followed by Colombia at -9.8%. Two BRICs round out the

The Dollar Index is trading at new 2013 highs, encouraged by the continuing sell-off of the yen and the weaker than expected euro area GDP, which contracted by 0.2% in Q1. However, the dollar's upside momentum appears to be stalling a bit.

Japanese investors did not extend the yen's decline seen in North America yesterday. Europe did and managed to run the stops and barriers believed to have been struck near JPY102.50, but has since begun consolidating. Sterling edged below $1.52 briefly and has since recovered on the back of an optimistic BOE Quarterly Inflation Report. The euro is trading heavier, but may be finding a bid near $1.2880.

In terms of foreign exchange, Mr. Market does not fight Abe and Kuroda, but when it comes to government bond market it is a different story. We have argued that the net consequence of raising inflation expectations and a weaker yen,

Japan is still the place where the biggest changes are happening on the margin. Stocks are still soaring as the yen falls, and now Japanese bond yields are soaring as well. Quantitative easing in Japan, which involves massive purchases of JGBs, has produced the counter-intuitive result: sharply lower bond prices. That's a good indication that monetary ease is working.

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The strong inverse correlation between the yen and the Japanese stock market is a predictable result of monetary stimulus that reverses deflationary pressures that had been generated by the yen's relentless climb against all other currencies.

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The chart above shows the yield on 10-year Japanese government bonds (JGBs). Note that yields are now higher than they were when the BoJ announced last November its intention to start buying lots of bonds. Yields fell for several months, but in the past few days they have

Fueled by the Bank of Japan's aggressive monetary policy, Japanese equities and exchange traded funds have made a robust run, but heavy-weight hedge fund manager Dan Loeb believes there is more to support Japan's rally.

Speaking at the Skybridge Alternatives, or "SALT," conference in Las Vegas last week, Dan Loeb, founder and CEO of Third Point hedge fund, stated that he was bullish on Japan's outlook, reports Stephen Gandel for CNNMoney.

While the BOJ's new quantitative easing measures is certainly supporting the current Japanese stock rally, Loeb points to other long-term trends. For instance, he believes the new political leadership could create a more efficient economy and improve growth. Specifically, Japan's new Prime Minister Shinzo Abe has promised to enact reforms that would change wages and bring more women to the workforce.

"It's the structural reform that we see that will be the big game changer," Loeb said.

By Tim Seymour

It's hard to feel good about the level of movement we have seen in Japan relative to itself. Sure, we've only seen a 25-basis-point move in the Japanese 10-year JGBs (Japanese government bonds), but this is from 0.60% yield to 0.85% yield and

By Ron Rimkus, CFA

Japan’s Nikkei index is on fire. In just the past six months, the benchmark is up 55% as of this writing. Why? Pretty simple: New Bank of Japan Governor Haruhiko Kuroda has announced that the Bank of Japan (BOJ) will begin purchasing approximately ¥7 trillion worth of bonds annually in a major new quantitative easing program. In short, Japan will be printing gobs of money and all of this money has to go somewhere. That may look like great news for investors who hold Japanese equities, but from where I sit, this has all of the classic makings of one big investment bubble.

Nikkei 225 Index
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Sources: CFA Institute, Dow Jones.

Even though Japan has been providing monetary stimulus for many years, the new policy represents a major expansion of the country’s existing response to deflationary pressures in the economy.

And the world said "Let Shinzo Abe be", and all was light.

"The point is not that I have an uncanny ability to be right; it's that the other guys have an intense desire to be wrong. And they've achieved their goal." Paul Krugman

A new craze is sweeping the planet. The image I have in mind isn't exactly that of the community of central bankers all dancing the Harlem Shake in unison, but for all the economic sense it has, it might as well be. In fact the craze is called "Abenomics" and it is gathering adepts in financial markets across the globe. A precursor in Japanese history has already been found for the movement, Korekiyo Takahashi, who was Japan's finance minister during the key years of the 1930s depression. Even a book has been written to extol his virtues entitled "From Foot Soldier to FinanceMinister: Takahashi Korekiyo, Japan's

The future never resembles the past - as we well know. But, generally speaking, our imagination and our knowledge are too weak to tell U.S. what particular changes to expect. We do not know what the future holds. Nevertheless, as living and moving beings, we are forced to act. - John Maynard Keynes

Discussions of the population problem have always had the capacity to stir up public sentiment much more than most other problems. - Gunnar Myrdal

Last Thursday the yen broke through the psychological threshold of 100 to the U.S. dollar. On Friday the slide continued (see chart), even dropping very close to 102 to the USD at one point before strengthening slightly on the run in to the G7 finance ministers meeting.

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The ostensible source of the sudden shift was a news release from the Japanese Ministry of Finance detailing the

Note from dshort: I updated this commentary last week, when Japan's Nikkei 225 was up 73.8% from its interim low in November of 2011. Guess what! A mere four trading sessions later, it's up 81.2%. After months of discussion and press speculation, last month the Bank of Japan disclosed its radical redo of monetary policy. The index is up 19.6% since the day before the unveiling on April 4th.

What about Japanese government bonds? The closing yield on the day the Nikkei hit its interim low on November 25, 2011 was 1.53%. While the index is up 81.2%, the 10-year yield is now at 0.74%.

Here's a quick review of the Nikkei 225, the 10-year bond and inflation over the past few decades.

The table below documents the advances and declines and the elapsed time for the major cycles in the Nikkei.

The