Have emerging markets begun to sink?
Market view from LMK Wealth Management
Markets slid considerably last week after investors were rattled by a confluence of events in emerging markets. For the week, the S&P 500 fell 2.63%, the Dow sank 3.52%, and the Nasdaq dropped 1.65%.[1] What were the international events that fueled the sell off?
Chinese manufacturing activity contracted in January for the first time in six months, according to one important survey. While there are probably some distortions in the numbers due to the Chinese New Year holiday, the data indicates that all may not be well with one of China’s most critical sectors.[2]
Political unrest in Turkey and financial turmoil in Argentina also stoked investor fears about these countries’ ability to maintain order.[3] Concerns about developing economies are being heightened by the Fed’s tightening of its easy money policies, which could hurt emerging markets. Loose monetary policy has helped keep interest rates low around the world. Countries that have relied on low borrowing costs to spur economic activity could face a period of painful readjustment to the new reality.[4]
Tapering highlights weak points in the emerging prospects
Investors seeking higher returns have also poured money into developing markets in recent years. The central bank’s tapering process now has investors scrutinizing the weak fundamentals that underpin many developing countries’ markets and wondering if their economies can stand on their own. If they pull their money out, developing economies could be hurt by damaged currencies, falling standards of living, and potential social unrest.
Fourth quarter earnings reports also drove some volatility last week. So far, results have been a mixed bag, with slightly more than half of the S&P 500 beating estimates. Of the 102 S&P 500 companies that have reported in, 63% have achieved earnings above expectations, as compared to 67% over the previous four quarters.
The takeaway
If any of last week’s headlines rob you of sleep, try to remember that it’s routine for economies and equity markets to cycle. While the selloff is troubling to some, it may also have created some opportunities to cherry pick investments with good upside potential at attractive prices. Investors buying the dip could spur another rally; disappointing data or a Fed surprise could cause the contraction to deepen. Whichever way markets move, we’ll be keeping our eyes on the trend and working to position our clients for long-term success.
ECONOMIC CALENDAR:
- Monday: New Home Sales, Dallas Fed Mfg. Survey
- Tuesday: Durable Goods Orders, S&P Case-Shiller HPI, Consumer Confidence
- Wednesday: EIA Petroleum Status Report, FOMC Meeting Announcement
- Thursday: GDP, Jobless Claims, Pending Home Sales Index
- Friday: Personal Income and Outlays, Employment Cost Index, Chicago PMI, Consumer Sentiment
