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A trader reacts in the Standard & Poor's 500 stock index options pit.
- The performance gap between US stocks and the rest of the world is at its highest level in several years.
- Neil Dwane, a portfolio manager and the global strategist at Allianz Global Investors, sees a binary outcome: it could be "phenomenally" painful or profitable for investors.
- "... at some point, you're going to have to sell the winners," he said.
Looking past the volatility of the last couple of days, the US stock market remains the clear global winner.
Strong earnings and economic growth have extended the bull market's lifespan into its record ninth year. US stocks now stand in sharp contrast to the rest of the world, which lost a tailwind of simultaneous economic growth this year and is underperforming the US in a way not seen since the 2008 crisis. The MSCI All-Country World Index excluding the US has shed 8% this year while the S&P 500 has soared by the same amount.
The world's largest economies are no longer expanding in sync, but there's no global recession either. That's what makes US stocks' outperformance unusual and could have a sour ending, according to Neil Dwane, a portfolio manager and the global strategist at Allianz Global Investors, which manages 524 billion euro ($603 billion) in assets.
"The question I'm increasingly asking my team is, 'Is the rest of the world going to recouple to the US?'" he told Business Insider in a recent interview.
"Or at some point, is everyone going to look at the US and go, 'They need to recouple to the rest of the world - down?'" he added. "The more this divergence continues, it's either going to be phenomenally powerful to buy the losers because they're going to catch up, or it could be phenomenally painful because at some point you're going to have to sell the winners."
Read more: Why $603 billion Allianz is bracing for a rocky end-of-year ride for markets
It's not unusual for there to be a gap between US and emerging-market stocks, and these typically run in multi-year cycles.
Dwane highlighted a few reasons why the gap this time could resolve with emerging markets catching up or US stocks falling.
As for the former, he pointed to the strong dollar, which has gained about 4% this year against its G10 peers. This only makes it more expensive for foreign companies and governments that have borrowed with dollars to meet their debt obligations. It's a risk that the Bank of International Settlement has said could lead to "lower growth on average, including deeper and prolonged recessions."
"A leveraged world that has actually solved the debt crisis with more debt just increases the fragility that one sees around the rest of the world," Dwane said.
As for the latter - US stocks falling - he noted that the US is further ahead than most countries with monetary tightening. "It's the US that has the extended cycle," he said. And even though interest rates remain low by historical standards, investors are betting - and worried - that the Federal Reserve will continue raising interest rates through 2020. Also, the US is also enjoying the "sugar high of Trump's fiscal policy" in the form of tax cuts, he said.
"The risks and the valuation are all against the US, and yet that's the only winner," he said.
It's also possible that emerging-market performance catches up to US stocks. While Dwane fell just short of making the specific recommendation to hunt for emerging-market assets, it's one that's being made across Wall Street, from the billionaire investor Jeremy Grantham to Merrill Lynch.