World Stocks Have Underperformed The US By The Most Since The Financial Crisis

Last week we noted that something odd was going on in global markets: in recent months, a near record divergence has opened up in the performance of risk assets, which previously was only observed during recessions.

As the S&P 500 marched towards its record bull market and a new all-time high, EM equities, copper and European banks were experiencing bear markets, while an EM FX carry has unwound almost all of its post-2016 gains.

This brings to mind a topic that Morgan Stanley’s chief equity strategist, Michael Wilson had been discussing for much of the past year, namely the idea of “rolling bear markets” in which one specific asset class is slammed even as the rest of the market remains surprisingly stable. For context he used the vol shock in early February and the sharp sell-off in Italian BTPs in May which “stand out as perhaps the best examples of what investors have had to deal with this year. Amazingly, neither of these events led to a broader, more systemic de-risking of portfolios. Instead, prices reset quickly in the affected assets and investors simply moved to higher ground”, namely the idea of “rolling bear marketsin a July note.

Further to this idea of a “rolling bear market”, Wilson described it as feeling “awful at times in specific places, but not everywhere at once.”

Perhaps it’s easiest to see when comparing regions, sectors or specific stocks. In other words, the damage below the surface is much worse than if you simply look at the broad indices. However, the higher ground is getting scarcer, with few completely dry areas.

Wilson then proceeded to lay out a dire outlook, which culminated with a downgrade of tech and small-cap stocks, noting that “global risk markets have absorbed a lot of bad news this year, not to mention meaningfully tighter financial conditions. We think that our rolling bear market narrative has captured this unusual dynamic quite well.”

Since these observations two months ago, the financial tightening around the globe as a result of the ascendant dollar coupled with global tariff concerns, has only made the “rolling bear markets” worse and according to Bank of America’s latest note. In particular, in Emerging Markets, BofA notes that its “Risk-Love” indicator has entered panic mode, while some of the defensive sectors in equity markets have hit record overbought readings.