The chart above compares the performance of the MSCI USA index to the MSCI World index. It provides a valuable perspective on the relative strength or weakness of the US stock market in comparison to the global stock market as a whole.
The MSCI USA index represents the performance of large and mid-cap stocks in the United States, encompassing various sectors and industries. It covers approximately 85% of the free float-adjusted market capitalization in the US. On the other hand, the MSCI World index represents global equity performance and includes stocks from developed markets across the world.
When the ratio rises, it indicates that US stocks outperform the rest of the world, whereas a decline in the ratio suggests underperformance by US stocks compared to the global market. By definition, this ratio cannot grow forever. At some point, US stocks would simply make up 100% of global stocks. The chart shows that, since the financial crisis of 2008, US stocks have been outperforming the rest of the world.
This chart gives a different view of the data from the chart above, comparing the percentage change between the MSCI USA Index and the MSCI World Index over time.
The ratio in the chart above divides the MSCI USA by the MSCI All Country World Index (ACWI) index. The MSCI ACWI is a better measure for global equities because it also includes emerging markets. It consists of the MSCI World Index and the MSCI Emerging Markets Index. However, as of March 2023, emerging markets stocks are only weighted with 10.94%, whereas stocks from developed markets account for 89.06%. The USA make up 60.56%, followed by Japan (5.49%), the United Kingdom (3.78%), and China (3.34%). The index is often used as a benchmark for the performance of global equity funds. Unfortunately, it only dates back to the year 1988.
This chart gives a different view of the data from the chart above, comparing the percentage change between the MSCI USA Index and the MSCI All Country World Index (ACWI) over time.
The chart above displays the 1-year rolling correlation coefficient between the MSCI USA Index and the MSCI World Index. A correlation coefficient of +1 indicates a perfect positive correlation, meaning that the two indices moved in the same direction during the specified time window. Conversely, a correlation coefficient of -1 indicates that they moved in opposite directions.
Diversification is the practice of spreading investments across different asset classes to reduce risk. In his book Principles, Ray Dalio called diversification the “Holy Grail of Investing”. He realized that with fifteen to twenty uncorrelated return streams, he could dramatically reduce the risks without reducing the expected returns.
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