Market Commentary
Mean Reversion: Part 1
A mean reversion is currently being experienced at the global level. Last year’s ugly ducklings are showing outperformance.
Europe is currently catching a bid after being deeply oversold last year and is being buoyed by the prospect of an end to the war in Ukraine.
Emerging markets are being supported by a pullback in the USD, with the DXY currency index peaking in mid-January.
Japan is bringing up the rear but still outperforming the S&P500.
A lot of the global price action is simply catch up from Q4 2024’s deeply oversold price action. In Q4 20024:
Europe was down 11.4%.
Japan was down 6.2%
Emerging Markets were down 8.8%.
Global ex-USA stocks were down 8.8%
The question now is, where is the puck going? Is this bounce sustainable? Should investors get more bullish on non-U.S. names and lard up on foreign risk?
It’s a loaded question, and one which is best approached systematically by examining the relative price action between the U.S. & Europe, the U.S. & Emerging Markets, and the U.S. & Japan.
We do so by using rolling, 100-day trading windows over the past decade to help us contextualize the recent non-U.S. outperformance.
The rest of this note is devoted to our first comp, U.S. versus Emerging Markets.
SPY vs. EEM: A Decade-Long Analysis of Relative Outperformance in Rolling 100-Day Windows (2015-2025)