From 1990 through 2010, foreign stock markets grew at unprecedented rates. By 2010, foreign exchanges accounted for more than $50 trillion of capitalization, about three times the capitalization of U.S. exchanges. A more detailed comparison of foreign and domestic markets shows that growth occurred unevenly across foreign markets, all displaying greater volatility than the U.S. market than one: Japan.
Index funds that track the stock returns of an entire market provide an accurate means of comparing growth in different markets. Comparison of an S&P 500 index fund of large U.S. companies (IVV) and an S&P 350 index of large European companies (IEV) over the 10 year period ending in July 2013, shows that the two markets generally tracked, making investment in European funds an inefficient way of achieving diversification. The European market also exhibited greater volatility. From July, 2003 until October 10, 2007, it exploded upward, gaining about 130 percent, while in the same period, the U.S. market gained under 50 percent. In the following Great Recession, both markets declined substantially, with European lows slightly less than 20 percent below their July 2003 starting point and U.S. lows slightly more, As of July 2013, both markets had substantial gains for the 10-year period -- a little over 50 percent for the European market, and a little under 70 percent for the U.S. market.
Comparison of an index fund for Asia, except Japan (symbol EPP) and a Japan index fund (EWJ) shows that the Japanese market grew about 60 percent over the 10 year period. Over the same period, the broader Asian market grew about 120 percent. Both markets had losses in the same Great Recession period -- 2007-09 -- that affected U.S. and European markets, but the Japanese market's losses and overall volatility were substantially lower, roughly tracking the U.S. market. Asian volatility was far greater than U.S. market volatility, with a downward market swing of 200 percent during the first months of the Great Recession.
A comparison of an emerging market index (GAF), and a Latin American index (ILF) shows the same correlation with the U.S. market noted for the other markets, with a sharp dip in both indexes beginning about six months after the market drops in the U.S. and Europe. Both the overall gains and the volatility greatly exceeded gains and volatility in U.S. Over the 10-year period, the Latin American market grew by about 180 percent. Emerging markets grew by 300 percent. At its peak in May 2007, the Emerging Market Index was up over 550 percent from July 2003.
For the markets surveyed, there is a strong correlation among stage of economic development, overall gain and volatility. Developed markets exhibited the least volatility; emerging markets the most. Emerging markets also enjoyed the greatest gains, followed by Latin American and Asian markets other than Japan. Japan, Europe and the U.S. had tightly correlated upward and downward market movements. During the Great Recession, emerging markets and Latin American markets declined, but about six months later than the Great Recession in the U.S.
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