Posts tagged ‘Russia’
Head Fakes Surprise as Stocks Hit Highs
In a world of seven billion people and over 200 countries, guess what…there are a plethora of crises, masses of bad people, and plenty of lurking issues to lose sleep over.
The fear du jour may change, but as the late-great investor Sir John Templeton correctly stated:
“Bull markets are born on pessimism and they grow on skepticism, mature on optimism, and die on euphoria.”
And for the last decade since the 2008-2009 Financial Crisis, it’s clear to me that the stock market has climbed a lot of worry, pessimism, and skepticism. Over the last decade, here is a small sampling of wories:
With over five billion cell phones spanning the globe, fear-inspiring news headlines travel from one end of the world to the other in a blink of an eye. Fortunately for investors, the endless laundry list of crises and concerns has not broken this significant, multi-year bull market. In fact, stock prices have more than tripled since early 2009. As famed hedge fund manager Leon Cooperman noted:
“Bull markets don’t die from old age, they die from excesses.”
On the contrary to excesses, corporations have been slow to hire and invest due to heightened risk aversion induced by the financial crisis. Consumers have saved more and lowered personal debt levels. The Federal Reserve took unprecedented measures to stimulate the economy, but these efforts have since been reversed. The Fed has even signaled its plan to reduce its balance sheet later this year. As the expansion has aged, corporations and consumer risk aversion has abated, but evidence of excesses remains paltry.
Investors may no longer be panicked, but they remain skeptical. With each subsequent new stock market high, screams of a market top and impending recession blanket headlines. As I pointed out in my March Madness article, stocks have made new highs every year for the last five years, but continually I get asked, “Wade, don’t you think the market is overheated and it’s time to sell?”
For years, I have documented the lack of stock buying evidenced by the continued weak fund flow sales. If I could summarize investor behavior in one picture, it would look something like this:
Corrections have happened, and will continue to occur, but a more significant decline will likely happen under specific circumstances. As I point out in Half Empty, Half Full?, the time to become more cautious will be when we see a combination of the following trends occur:
- Sharp increase in interest rates
- Signs of a significant decline in corporate profits
- Indications of an economic recession (e.g., an inverted yield curve)
- Spike in stock prices to a point where valuation (prices) are at extreme levels and skeptical investor sentiment becomes euphoric
Attempting to predict a market crash is a Fool’s Errand, but more important for investors is periodically reviewing your liquidity needs, time horizon, risk tolerance, and unique circumstances, so you can optimize your asset allocation. There will be plenty more head fake surprises, but if conditions remain the same, investors should not be surprised by new stock highs.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, but at the time of publishing SCM had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.
Nail Not in Emerging Market Coffin Yet
I wouldn’t say the nail is in the emerging market coffin quite yet. During the financial crisis, the EMSCI Emerging Market Index (EEM) was left for dead (down -50% in 2008) before resurrection in 2009 and 2010 (up +74% and +16%, respectively). For the last two years however, the EMSCI index has underperformed the S&P 500 Index massively by more than -30%. Included in this international index are holdings from China, Russia, India, Brazil, South Korea, and South Africa, among others.
The question now becomes, can the emerging markets resurrect themselves from the dead again? Recent signs are flashing “yes”. Over the last three months, the emerging markets have outperformed the S&P 500 by more than +8%, but these stocks still have a lot of ground to make up before reaching the peak levels of 2007. Last year’s slowing growth in China and a European recession, coupled with talks of the Federal Reserve’s “tapering” of monetary stimulus, didn’t provide the EMSCI index any help over the last few years.
With all the distracting drama currently taking place in Washington D.C., it’s a relief to see some other indications of improvement. For starters, China’s most recent PMI manufacturing index results showed continued improvement, reaching a level of 51.1 – up from August and signaling a reversal from contraction earlier this year (levels above 50 point to expansion). Chinese government leaders are continuing their migration from an externally export-driven economy to an internally consumer-driven economy. Despite the shift, China is still targeting a respectable +7.5% GDP economic growth target, albeit a slower level than achieved in the past.
Adding to emerging market optimism is Europe’s apparent economic turnaround (or stabilization). As you can see from the chart below, the European Institute for Supply Management (ISM) service sector index has lately shown marked improvement. If the European and Chinese markets can sustain these recovering trends, these factors bode well for emerging market financial returns.
While it is clear these developments are helping the rebound in emerging market indices, it is also clear the supply-demand relationship in commodities will coincide with the next big up or down move in developing markets. Ed Yardeni, strategist and editor of Dr. Ed’s Blog, recently wrote a piece showing the tight correlation between emerging market stock prices and commodity prices (CRB Index). His conclusions come as no surprise to me given these resource-rich markets and their dependence on Chinese demand along with commodity needs from other developed countries. Expanding populations and rising standards of living in emerging market countries have and will likely continue to position these countries well for long-term commodity price appreciation. The development of new, higher-value service and manufacturing sectors should also lead to sustainably improved growth in these emerging markets relative to developed economies.
Adding fuel to the improving emerging market case is the advancement in the Baltic Dry Index (see chart below). The recent upward trajectory of the index is an indication that the price for moving major raw materials like coal, iron ore, and grains by sea is rising. This statistical movement is encouraging, but as you can see it is also very volatile.
While the emerging markets are quite unpredictable and have been out-of-favor over the last few years, a truly diversified portfolio needs a healthy dosage of this international exposure. You better check a pulse before you put a nail in the coffin – the emerging markets are not dead yet.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs) including emerging market ETFs, but at the time of publishing, SCM had no direct position in EEM, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is the information to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.
U.S. Small-Caps Become Global Big Dog
With the emerging market currencies and financial markets under attack; Japan’s Nikkei index collapsing in the last three weeks; and the Federal Reserve hinting about its disciplinarian tapering of $85 billion in monthly QE3 bond purchases, one would expect higher beta small cap stocks to get hammered in this type of environment.
Before benchmarking results in the U.S., let’s take a closer look at some of the international carnage occurring from this year’s index value highs:
- Japan: -19% (Nikkei 225 index)
- Brazil: -22% (IBOVESPA index)
- Hong Kong: -12% (Hang Seng index)
- Russia: -19% (MICEX/RTS indexes)
Not a pretty picture. Given this international turmoil and the approximately -60% disintegration in U.S. small-cap stock prices during the 2007-2009 financial crisis, surely these economically sensitive stocks must be getting pummeled in this environment? Well…not necessarily.
Putting the previously mentioned scary aspects aside, let’s not forget the higher taxes, Sequestration, and ObamaCare, which some are screaming will push us off a ledge into recession. Despite these headwinds, U.S. small-caps have become the top dog in global equity markets. Since the March 2009 lows, the S&P 600 SmallCap index has more than tripled in value ( about +204%, excluding dividends), handily beating the S&P 500 index, which has advanced a respectable +144% over a similar timeframe. Even during the recent micro three-week pullback/digestion phase, small cap stocks have retreated -2.8% from all-time record highs (S&P 600 index). Presumably higher dividend, stable, globally-diversified, large-cap stocks would hold up better than their miniature small-cap brethren, but that simply has not been the case. The S&P 500 index has underperformed the S&P 600 by about -80 basis points during this limited period.
How can this be the case when currencies and markets around the world are under assault? Attempting to explain short-term moves in any market environment is a hazardous endeavor, but that has never slowed me down in trying. I believe these are some of the contributing factors:
1) No Recession. There is no imminent recession coming to the U.S. As the saying goes, we hear about 10 separate recessions before actually experiencing an actual recession. The employment picture continues to slowly improve, and the housing market is providing a slight tailwind to offset some the previously mentioned negatives. If you want to fill that half-full glass higher, you could even read the small-cap price action as a leading indicator for a pending acceleration in a U.S. cyclical recovery.
2) Less International. The United States is a better house in a shaky global neighborhood (see previous Investing Caffeine article), and although small cap companies are expanding abroad, their exposure to international markets is less than their large-cap relatives. Global investors are looking for a haven, and U.S. small cap companies are providing that service now.
3) Inflation Fears. Anxiety over inflation never seems to die, and with the recent +60 basis point rise in 10-year Treasury yields, these fears appear to have only intensified. Small-cap stocks cycle in and out of favor just like any other investment category, so if you dig into your memory banks, or pull out a history book, you will realize that small-cap stocks significantly outperformed large-caps during the inflationary period of the 1970s – while the major indexes effectively went nowhere over that decade. Small-cap outperformance may simply be a function of investors getting in front of this potential inflationary trend.
Following the major indexes like the Dow Jones Industrials index and reading the lead news headlines are entertaining activities. However, if you want to become a big dog in the investing world and not get dog-piled upon, then digging into the underlying trends and market leadership dynamics of the market indexes is an important exercise.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs) including emerging market ETFs, IJR, and EWZ, but at the time of publishing, SCM had no direct position in Hong Kong ETFs, Japanese ETFs, Russian ETFs, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.