This last week we saw the US markets shutter in response to concerns over emerging markets (EM) growth prospects. China’s Manufacturing PMI fell from 50.5 to 49.6 in December (less than 50 indicates contraction). The big question is not about the shutter, but rather the continued implication of an EM slow down. Will that bring US growth to a halt and end our current bull run? We should first look at what helped cause the recent bull run for EM in order to see what impact it will have on the US.
EM got a healthy dose of investment assets from the US after the financial crisis as investors ran from ultra low yielding treasuries and domestic bonds in general. This pumped funds into EM economies at a fever pitch; which led to growth and expansion in those nations.
During 2013 we saw the 10 year treasury jump from 1.61% to as high as 3.04% at year end. Investors who had fled to EM bonds are now returning as yield returns. This reduced liquidity in EM has produced some clear signs of concern as they are far more debt laden at this point in their expansionary cycles.
So what does this mean for domestic growth? The return of yield is as a result of an improving economic environment (and Tapering) and should be seen as an improvement in the US economy. The short term shutter in response to EM uncertainties, while not surprising, still has global implications and will cause ripples outside of their own nations, ripples, not tidal waves.
The equity markets have enjoyed a bull run without a meaningful pullback (10%-20%) since mid 2012, so it’s over due. Has the past 3 weeks marked the start of that pullback (S&P 500, -3.06% through 1/24/2014)? That remains to be seen.
Thus far 122 of the S&P 500 companies have reported earnings and 73% have beat expectations. Sales have strongly improved over 3rd quarter numbers, with 66% of companies reporting beating sales targets. The conference Board’s index of US leading indicators increased by .1%; still indicating economic expansion. Consumer confidence did fall and the US Manufacturing PMI did decrease to 53.7 from 55 (over 50 indicates expansion).
If you would like an in-depth analysis of your current positions and allocation, please feel free to call Jason Roque at 719-313-7536 to schedule an appointment.
Always remember that while this is a week in review, this does not trigger or relate to trading activity on your account with Financial Future Services. Broad diversification across several asset classes with a long term holding strategy is the best strategy in any market environment. Any and all third-party posts or responses to this blog do not reflect the views of the firm and have not been reviewed by the firm for completeness or accuracy.
Sources: mfs.com, oppenheimerfunds.com, investing.com, yahoo.com, and morningstar.com
* Financial Action, Inc. is a Registered Investment Advisor.