Many bulls pointed to the still intact long-term uptrend, calling the selloff simply a healthy short-term pullback after a strong year-end rally. Some of the excessive bullish sentiment has been worked off in January’s selling. The bears, on the other hand, cited softer economic data (including durable goods and new home sales), mixed earnings results, reduced liquidity in the form of more Fed tapering, and growing fears of emerging market contagion. China’s purchasing managers’ index (PMI) also slid to its lowest level since July, barely hanging above the threshold for expansion.
For the week, the S&P 500 lost 0.43%, the Dow fell 1.14%, and the MSCI EAFE (developed international) dropped 2.3%.
This year the market has caught a lot of people by surprise as the performance of many asset classes are not living up to expectations. The consensus expectation was for bonds to spike in January, but surprisingly the 10-year Treasury is now at 2.61% down from 3% at the end of last year. On the equity side, the market was expected to continue last year’s climb, but most U.S. indexes have started the year off by dropping more than 5%. Prognosticators have also been incorrect with regards to the yen and gold, as both assets have started the year on the positive side despite negative predictions. However, many long-term trends remain intact, so shorter year-to-date price movements may provide opportunities for investors to re-enter prior trades or themes at more attractive levels.
Here are the 3 stories this week that rose above the noise:
Emerging Markets – Don’t Panic
Global equity markets have pulled back due, in part, to concerns over emerging markets. Recent events in Turkey and Argentina have eerie echoes of the early stages of the 1997-1998 emerging-market crisis. Could 2014 bring a repeat? An article from The Economist provides a measured look at the bull and bear case, ultimately siding with the bulls. They cite arguments from the International Monetary Fund that most emerging markets are far less vulnerable than they were in 1997. They have flexible exchange rates, higher reserves (a whopping $7.7 trillion in total), smaller current account deficits (only two of 25 have deficits above 5% of GDP) and their debts are lower and more likely to be domestic currency.
January Auto Sales Are No Cause for Panic
U.S. auto sales dropped to a 15.24 million annualized pace in January, the first contraction in vehicle sales since September 2013, as most of the country suffered through extremely cold weather and record snowfall in some regions. The disappointing auto-sales numbers look concerning in light of recent weakness in other major economic data points. However, January is historically a weak month for auto sales, the weather last month was abnormally severe, and sales were strong in the West where the weather was good. The consensus expectation among industry analysts is for auto sales to increase to 16 million in 2014, ahead of 15.6 million vehicles sold in 2013, which would be the first time auto sales reached 16 million since 2007.
Emerging-market Rout Seen Enduring on Low Real Rates
A recent Bloomberg article provides a summary of the ongoing emerging-markets concerns that have been a big driver of recent market volatility. The article provides some evidence that emerging currencies will remain under pressure due to real interest rates that are still too low. If central banks in emerging economies are forced to increase interest rates in order to stabilize currency markets, that in turn would likely lead to a further slowing of economic growth. This dynamic has turned investor sentiment toward emerging markets extremely negative in recent weeks and explains why investors will continue closely watching developments in emerging currency and debt markets in the coming weeks.
Articles chosen and summarized by the First Allied Asset Management, Inc. investment management team.
