The table below illustrates the widely divergent performance between U.S. stocks and international stocks this year. For example, the S&P 500 is up 15.34%. Yet Emerging Markets are up just 1.15% and Germany is up only 2.54% (based on the corresponding iShare ETFs in U.S. dollar terms). Furthermore, performance over the past 100 days has generally been dismal, even for the U.S.:

ETF Description


Past 100
Days Perf.
Price/Cash Flow
Price/Cash Flow
10-year Avg.
IVV S&P 500 ETF 15.34% 0.37% 14.1 11.7
EEM Emerging Markets ETF 1.15% -10.33% 8.3 8.5
EWU United Kingdom ETF 2.28% -10.97% 8.5 8.4
EWJ Japan ETF 5.62% -3.24% 7.3 7.7
EWG Germany ETF 2.54% -6.86% 7.3 7.5
EWW Mexico ETF -4.06% -12.04% 6.9 10.4
AAXJ All Country Asia ex-Japan ETF 1.83% -10.91% 9.2 9.2
FXI China Large-Cap ETF -0.24% -14.38% 10.5 9.3
EWH Hong Kong ETF 2.48% -14.24% 10.5 11.8

Performance data through 12:00 EST 8-27-2019. Source: Barchart. Price/Cash Flow multiples as of 7/31/2019, based on corresponding MSCI indexes.

The world-leading year-to-date U.S. performance resulted, in our view, partly from the continuing decline in international economic growth prospects and a loss of confidence by international investors and CEOs. This forced capital toward the U.S.

Even though U.S. economic growth was also decelerating, the U.S. was still being bolstered by decent earnings, a pro-business environment, strong consumer spending, good employment and the general sense that the U.S. wouldn’t enter a recession in the foreseeable future. This led to U.S. Consumer Confidence remaining optimistic.

Interestingly, U.S. Consumer Confidence is back to levels last seen before the Tech-Wreck of 2000-2003 (red circles on next chart) and higher than what was reported prior to the “Great Recession” of 2008. This can be interpreted two ways: 1) Consumer Confidence is strong and likely to continue to support financial assets, or 2) Consumer Confidence is overly optimistic and we are setting up for a fall. (Note: the gray vertical bars on the chart represent U.S. recessions.)

Consumer Confidence Index and Its Components.

Like many types of “survey” indicators, typically they start to deteriorate well in advance of actual broad-based weakness or actual recessions. As shown in the chart, the “Present Situation Index” peaked eight months before the 2001 recession and nine months before the 2008 recession. However, there have also been plenty of false signals (and why we use lots of different indicators). Notice the plunge lower in 2011 in the overall Consumer Confidence Index and the Consumer Expectations Index. Recall that in 2011 1) the U.S. had its sovereign debt downgraded for the first time in history to AA+ from AAA (by S&P) as a result of the debt ceiling debates, 2) there were concerns around the European debt crisis, 3) the U.S. economy was slowing, and 4) the Fed backed off from more QE as QE2 was ended in June (announced in April), among other things. Using intraday values, the S&P 500 declined over 20% during 2011. Nonetheless, the current level of consumer confidence supports the notion that consumers are still supporting the economy.

The next chart illustrates a survey of CEO Confidence. Its most recent peak, shown by the top red circle, occurred on March 31, 2018, and was taken just 30 days after President Trump announced the first tariff (March 1, 2018) on all imports of steel and aluminum. On March 22, 2018, the President announced plans to place additional 25% tariffs on $50 billion of Chinese goods. China then announced more tariffs, and, well, CEOs weren’t thrilled. Confidence has now plunged to levels seen in 2011/2012 when the EU’s “going concern” status was being openly questioned (note: we still don’t think the EU will survive as an entity, but it will take years to dissolve).

CEO Confidence Index Chart

While high U.S. consumer confidence levels support consumer spending, low U.S. CEO Confidence levels illustrate why CEOs are hesitant to deploy capital to grow their businesses (instead opting to buy back stock and/or increase dividends). Based on the National Federation of Independent Business survey of Capital Expenditure Plans, just 28% of respondents were expecting spending to rise over the next 3 to 6 months. This is in comparison to a high of about 40% during the mid-1990s and 15% at the recession lows. Like Consumer Confidence, the CEO Confidence measure can be viewed two ways: 1) CEO confidence is weak and a headwind to CapEx spending, thus impeding overall corporate profit growth, or 2) CEO confidence is so bad it’s good, meaning that CEOs likely have dry powder and will unleash a wave of capital spending once the corporate operating environment shows sustainable improvement.

Interestingly, but hardly surprisingly, European corporate capital spending levels (in euros) has been flat since 2009. The ZEW Indicator of Economic Sentiment for the Euro Area plummeted in August to the lowest levels since 2011. (The ZEW surveys up to 350 financial and economic analysts about their expectations for economic growth over the next six months.) Germany’s DAX 30 Stock Market Index is now back to levels seen in early 2015.

These indicators are two of the many hundreds that we follow, but the story they tell is consistent with our overall investment views:

  1. Currently, our broad-based composite models remain at mildly bullish levels. However, much of the bullish support is due to the high U.S. weighting in the world’s combined market value. The U.S. is 40% of the world’s stock market capitalization. Japan and China are each only about 7.5%. (Source: Bespoke)

  2. The U.S. remains the preferred regional opportunity from a U.S. investor’s perspective. We have been overweight the U.S. in our Tactical Allocation strategy for all but three months since 2015. The U.S. sports the highest model readings of all the regions we track—by far.

  3. Even though we’ve largely been underweight international equities, their meager returns have been a negative relative influence. However, many international regional indicators are “so bad, they’re good.” This indicates that a lot of negative news and expectations are priced in. One must keep in mind that Brexit, tariffs, Italy, Hong Kong, Taiwan, China, Iran, Strait of Hormuz, and other geopolitical fears have already been incorporated into investors’ risk forecasts. Once those risks start to abate, the opportunities will increase. We are monitoring our models closely for improvements that would dictate taking on more international risk. To be clear: At some point, international will outperform. But until the weight of the evidence improves, we’ll keep our powder dry.

  4. We see many contradictory potential inflection points. This is why our equity allocations are only slightly above our benchmark weightings. For example, will consumer confidence peak and reverse lower, causing consumer-related stocks to underperform and contribute to more economic weakness than currently priced into the market? Will CEO confidence trough and reverse higher, causing CapEx beneficiaries to outperform? As shown in the first table on page 1, while the U.S. has clearly led in performance, it is now the most “expensive” market shown, even relative to its 10-year average Price/Cash Flow multiple. Will the valuation differentials be rectified with the U.S.-valuation multiples declining and international multiples increasing? Or will the trend differentials continue to widen the valuation disparities? Currently, there isn’t a clear path, which is why our models’ overall message is “cautiously optimistic.”

  5. This is also why we prefer a weight-of-the-evidence approach that incorporates measures of technical, behavioral, fundamental and economic factors. Whether the markets resume the recent decline, or a bottom has formed, setting the stage for strong gains in 2020, we will continue to unemotionally evaluate the weight of the evidence and adjust the allocation accordingly.

  6. Please keep in mind that today’s research update is but a microcosm of the factors influencing financial asset pricing. For more details, please make sure to sign up for our monthly Market Update and Technical Analysis Tuesday webinars.

If you have any questions or comments, please feel free to call or email anytime.


Donald L. Hagan, CFA
Arthur Day
Arthur Huprich, CMT
Regan Teague, CFA

—Written 08.27.2019 

PDF Copy of Article: Day Hagan Research Update August 28, 2019 (pdf)


Day Hagan Market Update with Donald Hagan, CFA, September 11, 2019 at 4:15 PM EST

Day Hagan Technical Analysis Tuesday with Art Huprich, CMT, September 17, 2019 at 4:15 PM EST


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