Once again, the U.S. stock market is getting choppy. And once again, the doom-and-gloom headlines abound.
Yes, the Dow Jones Industrial Average DJIA, +0.23% logged eight straight declines recently. Yes, most economists and investors with a brain admit that escalation of global trade-war talk is a net negative for all parties. And yes, stocks have enjoyed one heck of a run since 2009 and can’t keep this up forever.
But all that doesn’t mean you shouldn’t buy stocks right now.
After all, market research firm FactSet reported in its latest Earnings Insight that second-quarter earnings are expected to rise 19% across the S&P 500 SPX, +0.08% components.
And despite all the recent volatility, the S&P is still up about 2% over the first six months of the year, and up about 14% in the last 12 months.
That hardly sounds like the world falling apart, does it?
Admittedly, there are serious challenges if the market is to score additional gains now that tax cuts are priced in and consumer confidence is near record highs. Even so, U.S. equities remain the best game in town.
With the Federal Reserve committed to raising rates, the bond market is struggling. Just look at the 4% decline for the iShares 20+ Year Treasury Bond ETF TLT, -0.34% this year, and declines of about 1% for the JNK, -0.22%
But more important for growth-oriented investors, “normalization” at the Federal Reserve is having a serious effect on capital flows out of emerging markets. The International Monetary Fund recently estimated that Fed tightening “will likely reduce portfolio inflows by about $70 billion over the next two years.”
This flight of foreign capital not only risks more sellers than buyers, but also may make it significantly more difficult to finance emerging-market debts as older, lower-rate loans mature and need to be rolled over.
This is not an academic exercise in monetary policy and geopolitics, either. A June study by the Institute of International Finance figures showed foreigners unloaded a combined $12.3 billion in emerging-market bonds and stocks in May — with $8 billion of that getting sucked out of Asia alone.
Sure, the U.S. stock market has been volatile. But it’s not facing a systemic crisis.
So if you’re worried about your domestic equities right now, take a deep breath and relax. Here are some rather ugly markets you should consider as proof of how rough it can be before you start looking frantically for opportunities overseas.
Argentina has been on the blacklist for some investors for a while, given its history of sovereign debt problems. And it’s looking grim on that front once again.
Sure, a year ago investors were cheering the possibility of reforms and projections of GDP growth of more than 3% in 2018. But things look much different now — as evidenced by the Merval’s MERV, -2.81% gut-wrenching 9% plunge Wednesday on the Buenos Aires Stock Exchange.
The current challenges, including debt tensions and rising inflation, are quite serious. The exchange-traded funds iShares MSCI Argentina and Global Exposure ETF AGT, -1.80% and Global X MSCI Argentina ETF ARGT, -1.39% are both off about 15% this year as a result.
After a massive 2014 government corruption scandal, Brazil clawed its way back into the good graces of some investors. But that enthusiasm seems to have evaporated in a hurt, as evidenced by the roughly 25% decline for the widely held iShares MSCI Brazil Capped ETF EWZ, +0.50% from its February highs.
In June, the Brazilian real hit its lowest level vs. the U.S. dollar since early 2016 when stocks in this region bottomed. That’s in part because of recent labor unrest, but also anemic economic growth: The 2018 forecast was just slashed to a 1.6% annual rate, from 2.6%.
Throw in a forecast of inflation around 4% and it’s not a recipe for success — particularly given that many investors burned by this BRIC may not be so eager to dive back in to this emerging market.
You can’t have a list of challenged emerging markets without China. The biggest ETFs that play the region, including the iShares China Large-Cap ETF FXI, +1.44% the iShares MSCI China ETF MCHI, +1.49% and the SPDR China ETF GXC, +1.51% that collectively command $8.5 billion in assets, have losses of between 8% to 12% year-to-date.
The common claim is that it’s simply the fallout of trade-war posturing. But remember, there have long been structural challenges to China investments that include massive debts in both the private and public sector. In fact, a leaked report from a government-backed think tank warned of a “financial panic” that could be caused by cascading defaults and a liquidity crisis.
To be fair, just as hysterical pundits have warned against a U.S. debt crisis for years they also have been chewing their nails over China. But given the recent declines and outflows of capital to emerging markets, this time it may be more than just rhetoric.
While the Philippines has been one of the fastest-growing economies in Asia, with annual GDP growth rates just shy of 7% for the last few years, it now faces the very real challenge of runaway inflation thanks to that brisk growth rate.
Specifically, in May inflation hit 4.6% for the fastest pace in five years and well above the central bank’s target range of 2% to 4%. The nation’s central bank is starting to act as a result, but a combination of higher rates and higher prices are starting to put pressure on businesses and consumers alike.
It doesn’t help that Philippines President Rodrigo Duterte, a strongman who has even used the word “dictator” to refer to his leadership, is not known for his contributions to political uncertainty. As a result, the iShares MSCI Philippines ETF EPHE, +2.27% has skidded about 23% year-to-date in 2018.
Poland perhaps isn’t on the list of nations you’d consider an emerging market, but this Eastern European country shares much more with the other countries on this list than it does with Western economies like France and Germany. In fact, growth here has been one of the brightest spots in the European Union lately, with GDP running at just under 3% annual rate — including a massive 5.2% spike in first-quarter growth this year.
Unfortunately, Poland’s growth has been built largely on consumption fueled by government entitlements, something many investors think is unsustainable despite the impressive headline numbers.
While Polish elected officials may be crowing about strong numbers, Wall Street certainly hasn’t been. The iShares MSCI Poland ETF EPOL, +1.73% is down over 20% in 2018.
Another nation that was booming last year but suffering mightily in 2018, South Africa saw its GDP decline by more than 2% in the first quarter — the worst slump in nine years, dating back to the dark days of the global financial crisis.
As growth and optimism has evaporated, so has lending. And worse, at the end of 2017 S&P downgraded South Africa’s debt to junk status as the economic outlook appeared increasingly grim.
The struggles of several months ago would have been hard enough to break free of without talk of a trade war and the significant flight of capital from emerging markets. Now, in the thick of 2018, it seems unlikely South Africa will right itself anytime soon.
That’s what investors seem to think, anyway, judging by the 20% decline in the iShares MSCI South Africa ETF EZA, +3.75% since Jan. 1.
Turkey is another country that is in relatively dire straits, but its troubles stand out even among the other unfortunate members of this list. That’s because its inflation problem is in a class by itself.
Consider that in May, consumer price inflation nearly hit 11%. And consider that to beat back this crisis, the Central Bank of the Republic of Turkey has been tightening aggressively, including a rate increase of 3.0% in May alone. That’s right: 300 basis points in a single move!
Making matters worse, President Tayyip Erdogan has described himself as “an enemy of interest rates” — which seems very much at odds with any hopes of taming this beast.
No wonder the iShares MSCI Turkey ETF TUR, +0.30% is down almost 30% in 2018.