When it comes to global market moves, the U.S. is driving the bus – a fact that could weigh on stocks everywhere as investors again contemplate a U.S. economy that is about to lose its biggest source of support.
Strategists at Pavilion Global Markets noted that the world remains highly correlated with the U.S. market, which means that major indexes tend to zig and zag together. But they added another layer to the analysis by looking at which market has the most influence – or has the greatest "gravitational pull," as they put it.
Not only does the U.S. have the greatest pull, but it's getting more powerful.
"Movements in U.S. equities have impacted other benchmarks more and more over the years," the strategists said in a note. "During the past 12 months, the variance in U.S. stocks explained about half of the movement in the MSCI World excl. USA index."
For Canadian stocks, 52 per cent of the variation is explained by U.S. stocks since 2000, meaning that Canadian stocks are more influenced by what's going on State-side than what is happening domestically. In Europe (U.K., Germany and France), the number is about 40 per cent, which is still extremely high – and compares to a European influence on U.S. stocks of close to zero. In Japan, the U.S. influence is nearly 24 per cent.
This huge degree of U.S. influence is about to go on display as the Federal Reserve gets ready to taper its bond-buying stimulus, known as quantitative easing or QE. There is no set date for the tapering to start, but every piece of upbeat economic news – such as Monday's release of the ISM manufacturing index for November – seems to bring the start-date a little closer.
That raises concerns over whether stocks can continue to perform well without Fed assistance, or could correct sharply. The S&P 500 surrendered early gains on Monday, closing 10 points below its intraday high. On Tuesday, European stocks were down more than 1 per cent.
"The tapering process in the U.S. will cause a short pullback in global equities," the Pavilion strategists said.
"However, this should be a viewed as a buying opportunity. Investors will realize at some point that the only reason the Fed tapered was because it was convinced that the economy is strong enough to thrive on its own. Ultimately, the improvement of the U.S. economy will push global stocks upwards and global bonds downwards."
In other words, the U.S. influence on global stocks can be a good thing.
David Berman