Opportunity Spreads Across the Atlantic
Last week's foray into the spread between the U.S. large-capitalization and small-capitalization stocks as represented by the Russell 1000 (RIY) and Russell 2000 (RTY) indices, respectively, can be extended across the Atlantic.
The spread between the Russell 1000 and the Dow Jones Euro Stoxx 50 (SX5E) index embeds elements of international diversification, sector analysis and currency trading all at once.
The Euro Effect
For all of the bashing of U.S. financial markets and dollar-denominated assets by those who have an apparent need for self-loathing, American markets have done pretty well in comparison with the SX5E.
During the long bull market of the 1990s -- does anyone else find it hard to believe that ode to excess is five years in the rearview mirror? -- the RIY and the SX5E mirrored each other step for step prior to any currency adjustment.Of course, most of that was before the advent of the euro in January 1999. Once the multinational currency was introduced to a widespread drubbing -- does anyone remember when holding the euro was considered a one-way trip to oblivion? -- the SX5E took off like a scared rabbit. The RIY and SX5E fell apace during the ensuing bear market and really did not diverge until well after the dollar's decline began in earnest in the second quarter of 2002. This has been an odd artifact of the currency-equity relationships for the past decade: The country whose central bank is loosest generally has a weakening currency but greater financial liquidity and prospects for economic growth. Its stock market benefits, at least in nominal terms.
|Euro Stoxx and the Russells
|The Stock Spread Leads the Currency Trade
A Market of StoxxWe cannot construct as fine a comparison between the RIY and the SX5E as we could between the RIY and the RTY. First, the index providers, Russell and Dow Jones, have their own methodologies. Second, it is much easier to slice and dice 1,000 stocks into meaningful categories than it is for 50 stocks. Even so, the SX5E's group weights do contain some useful information.
|Weighing the Euro Stoxx
|Weighing the Russells
|Currency and Size-Adjusted Spread
|Far Off the Beaten Track
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