Posts tagged: stocks
Emerging markets have been hammered this year. The iShares MSCI Emerging Markets Index is down 11.39% year-to-date at the time of this writing. At the end of the day, the world economy is substantially lagging the U.S. economy. Additionally, the policy decisions of the U.S are benefiting the U.S economy while not particularly helping the emerging markets. Investor sentiment regarding emerging markets is near rock bottom. As a contrarian, I see this as a potential positive. For those investors looking to add an emerging markets component to their portfolio, this could be a great buying opportunity.
Fundamentals of Emerging Markets
Emerging markets, despite the recent performance, have many positives working in their favor. They now represent approximately half of global Gross Domestic Product (GDP) and their share should continue to grow in the coming years. According the International Monetary Fund ( IMF ), developed economies will expand by 1.2% while emerging economies will reach an average growth rate of 5.3% this year.
Many of these countries have large, young populations that will be critical for supporting economic growth. Read more »
Unless you have been living under a rock, you are probably aware that the conflict in Syria is escalating. The events in Syria are tragic from a human standpoint but from an economic and stock market perspective any fears regarding the crisis are most likely overblown.
Equity Returns Following Wars
I don’t mean to sound callous about any of this but my job is to look at it from an economic perspective. The historical performance of the market following the outbreak of both major and minor wars seems to indicate that, regardless of the actions taken by the U.S. or UN forces, there will likely not be a lasting effect on global equity markets.
For the moment, assume these recent developments drag the U.S. into the middle of another civil war in the region and ground forces are brought in to stop the killing of Syrian civilians. History teaches us that wars are not harbingers of bear markets. Certainly in the short run conflicts can cause the market to drop as people fear the worst and investors’ risk aversion tends to increase.
However, when you look at historical equity returns following the outbreak of a war, you’ll find the wars seem to have a slightly positive impact on the equity markets. There are many examples of this throughout history. One year after the start of WWI in 1914, the Dow Jones Industrial Average (the Dow) dropped 0.98%. Five years after the start of the war to end all wars, the Dow was up 25.54%. From the start of WWII on September 1, 1939, the Dow Read more »
The Federal Reserve has been on a bond-buying spree since the start of the financial crisis, trying to flood the economy with cheap money. The Fed is currently buying $85 billion worth of Treasury and Mortgage-backed securities each month to help stave off deflation and accelerate economic growth. While the Fed’s action is just one of many reasons the S&P 500 is up more than 14% year-to-date, it hasn’t had the intended effect on the U.S. economy. Here is why:
Companies, especially banks, have been hoarding cash since the financial crisis in 2008. Banks have been worried about a repeat, being caught with too few reserves and too much toxic debt. Thus, instead of flooding the economy with cheap cash, Quantitative Easing has only flooded balance sheets with cash. The vast majority of the money has not been lent out, essentially blocking the money from reaching the broader economy and accelerating economic growth, which was the primary goal of QE. The monetary base has swelled from $800 billion before the crisis to nearly $3.4 trillion now. However, consumer loans at commercial banks have gone from approximately $800 billion to $1.1 trillion during the same period. Because of this Read more »