U.S. stocks have been stuck in a six-week trading range as investors struggle to digest the effects of changes in Federal Reserve policy and the drag of winter weather on the U.S. economy. While U.S. markets continued to struggle for direction, emerging markets rallied – an unfamiliar condition in recent years. Commodities, which are closely tied to emerging economies, also staged a rally. Emerging-markets strength continues to come from India, where hope that a new government will spur economic growth has pushed equities to record highs. It’s unclear, though, whether last week’s emerging-markets strength was simply an oversold rally or the early indications of a new “risk-on” phase in the global equity markets.
For the week, the S&P 500 dropped -0.48%, the Dow gained +0.12%, and the MSCI EAFE (developed international) rose +2.15%.
Here are the 3 stories this week that rose above the noise:
Here Comes $75 Oil
Gene Epstein of The Wall Street Journal details the case for a very prolonged bear market in oil prices driven by surging production from deep water, shale and oil sands. These relatively new sources are providing a huge boost to previously estimated reserves and, coupled with slowing demand growth, could set the stage for much lower oil prices in real terms over the next decade.
The implications for this are likely positive for consumer spending and real economic growth, and extremely negative for countries such as Russia that are highly reliant on oil-and-gas revenues. While in the short-term oil prices may have some upward pressure from geopolitical concerns, longer-term the fundamentals seem to point to declining prices.
Yellen Assures Markets on Interest Rates
Janet Yellen, the new U.S. Federal Reserve Chairwoman, rattled markets less than two weeks ago by implying a sooner-than-expected rise in interest rates after a Fed policy meeting. However, yesterday, she made clear at a speech in Chicago that the Fed intends to keep interest rates low until the market is much stronger.
She said “while there has been steady progress, there is also no doubt that the economy and the job market are not back to normal health.” She went on to list five reasons that she sees continuing slack in the U.S. economy, including seven million part-time workers that would prefer to be in full-time jobs. Ms. Yellen’s quick re-messaging of her previous comments implies that she wants capital markets to continue to view the Fed as being unusually accommodative.
Emerging Markets Are Attractive
A recent article, based on a recent Merrill Lynch Fund Manager Survey, highlights a few interesting points on emerging market sentiment. Fund managers are currently extremely underweight emerging markets as seen by reporting of their largest underweight position in the asset class since the survey began in 2007.
Additionally, cash levels have increased and show a high correlation with the performance of the emerging markets equity. However, the asset class is starting to look extremely attractive from a long-term valuation standpoint with the overall MSCI Emerging Markets Index trading at 1.4 price to book value, and certain countries already trading close to or even below book value.
The MSCI Emerging Markets Index is designed to measure equity market performance in global emerging markets. It is a float-adjusted market capitalization index that consists of indices in 21 emerging economies: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand and Turkey. International investing involves additional risk, including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. Investing in companies involved in one specified sector may be more risky and volatile than an investment with greater diversification.
Articles chosen and summarized by the First Allied Asset Management, Inc. investment management team.
