Distinct and Predictable U.S. and ROW Equity Market Cycles?

A subscriber asked: “Some pundits have noted that U.S. stocks have greatly outperformed foreign stocks in recent years. What does the performance of U.S. stocks vs. foreign stocks over the last N years say about future performance?” To investigate, we use the S&P 500 Index (SP500) as a proxy for the U.S. stock market and the ACWI ex USA Index as a proxy for the rest-of-world (ROW) equity market. We consider three ways to relate U.S. and ROW equity returns:

1. Lead-lag analysis between U.S. and ROW annual returns to see whether there is some cycle in the relationship.
2. Multi-year correlations between U.S. and next-period ROW returns, with periods ranging from one to five years.
3. Sequences of end-of-year high water marks for U.S. and ROW equity markets.

For the first two analyses, we relate the U.S. stock market to itself as a control (to assess whether ROW market behavior is distinct). Using monthly levels of the S&P 500 Index and the ACWI ex USA Index during December 1987 (limited by the latter) through April 2024, we find that: (more…)