Divergence is Another Word for Opportunity

When I look at the strong gains in the domestic equity market over the past year, I tend to feel a bit ambivalent. On the one hand, this market has proven resilient to threats of all kinds, and has continued to march higher in the face of a lot of adversity. On the other hand, if I am considering putting more money to work here, I certainly don’t want to do it with the S&P 500 trading at new all-time highs.

During the past 12 months, the S&P 500 is up nearly 24%. That’s a trend that, while certainly rewarding for investors, isn’t likely to continue at its current pace. The chart below shows the big move higher in $SPX during the past year.

The story has been one of divergence for stocks in the emerging markets. The iShares MSCI Emerging Markets (EEM) actually has declined slightly during the past year. The chart here of EEM stands in stark contrast to the power move higher made in $SPX during the past 12 months.

Yet the divergence here between domestic stocks and emerging market stocks is, I suspect, an opportunity to buy a great value proposition in EEM. In fact, I am of the opinion that emerging markets, Asia and other global equities actually represent a better long-term value than stocks here in the United States.

Yes, we’ve seen a strong year for domestic equities; there is no denying that. But considering how far these stocks have run in 2013, I think the chances of money continuing to pour into the sector are far less than the prospects that capital will seek value in the relatively beaten-up emerging markets.

So, if you are looking to put new money to work in stocks, consider the value proposition that this divergence has created, and consider investing outside U.S. borders.