When looking at U.S. equities, it appears that the brief October selloff is all but forgotten. The S&P 500 (ETFs: IVV, SPY) continues to reach new all-time highs, gaining 2.4% in both October and November – for a 13% YTD gain as of Dec 19th.

Not so for global markets that presented investors with losses this year. Most broad global index ETF returns clustered in a remarkably narrow -2% to -6% range (in USD terms, which is what matters for U.S. investors), as shown on the chart below. Add Canada and Australia – still in the same range! Of course, “emerging markets” is a very broad category, in which some markets such as China (MCHI, +1.0%) are doing Ok, while Russia (ERUS, -51%) collapsed.

Global Equity ETFs, YTD Performance: S&P 500 (SPY), Emerging Markets (IEMG), Japan (EWJ), Europe (IEV)

Source: Ycharts

Why such large differences among global markets? In short: due to their economic fundamentals. U.S. GDP growth was above 3.5% in the past two quarters, driven by broad economic strength. In contrast, after slow growth in 2013 the Eurozone economies slowed further this year. China’s economy continues to decelerate, while Russia and many developing economies are facing a new challenge after the recent drop in commodity prices which we expect to continue. These fundamentals explain the striking differences in the performance of global equity markets.

Model Capital Management LLC is a tactical investment manager. Please review the following pages for more information on Model Capital’s approach to tactical investment management and our tactical asset allocation models/strategies.