Looking past the volatility of the past couple of days, the US stock market remains the clear global winner.
Strong earnings and economic growth have helped extend the bull market's lifespan into a record ninth year. US stocks now stand in sharp contrast to those elsewhere, which lost a tailwind of simultaneous economic growth this year and are underperforming the US in a way not seen since the 2008 crisis. The MSCI All-Country World Index excluding the US has shed 8% this year, while the S&P 500 has soared by the same amount.
The world's largest economies are no longer expanding in sync, but there's no global recession either. That's what makes US stocks' outperformance unusual and is why it could have a sour ending, according to Neil Dwane, a portfolio manager who is the global strategist at Allianz Global Investors, which manages 524 billion euros, or $603 billion, in assets.
"The question I'm increasingly asking my team is, 'Is the rest of the world going to recouple to the US?'" Dwane told Business Insider in a recent interview.
"Or at some point, is everyone going to look at the US and go, 'They need to recouple to the rest of the world — down?'" he added. "The more this divergence continues, it's either going to be phenomenally powerful to buy the losers because they're going to catch up, or it could be phenomenally painful because at some point you're going to have to sell the winners."
It's not unusual for there to be a gap between US stocks and emerging-market stocks, and these typically run in multiyear cycles.
Dwane highlighted a few reasons the gap this time could resolve with emerging markets catching up or US stocks falling.
Regarding possible US headwinds, he pointed to the strong dollar, which has gained about 4% this year against its G10 peers, making it more expensive for foreign companies and governments that have borrowed with dollars to meet their debt obligations. It's a risk the Bank of International Settlement has said could lead to "lower growth on average, including deeper and prolonged recessions."
"A leveraged world that has actually solved the debt crisis with more debt just increases the fragility that one sees around the rest of the world," Dwane said.
Dwane also noted that the US was further ahead than most countries with monetary tightening. "It's the US that has the extended cycle," he said. And even though interest rates remain low by historical standards, investors are betting — and worried — that the Federal Reserve will continue raising interest rates through 2020. Also, the US is also enjoying the "sugar high of Trump's fiscal policy" in the form of tax cuts, he said.
"The risks and the valuation are all against the US, and yet that's the only winner," he said.
As Dwane said, it's also possible that emerging-market performance catches up to US stocks. While he fell just short of making the specific recommendation to hunt for emerging-market assets, it's one that's being made across Wall Street, from the billionaire investor Jeremy Grantham to Merrill Lynch.
NOW WATCH: Inside the Trump 'MAGA' hat factory
Article by [author-name] (c) Finance - Read full story here.