Bob’s Journal 1/31/2019

Most investors are focused on U.S. markets, but this is a good time to take a look at emerging markets.

While U.S. markets were outpacing the world from the second half of 2016 through the first three quarters of 2018, emerging markets lumbered through another bear market during much of that time. We sold our emerging market positions in the Retirement Watch portfolios.

U.S. markets joined the global decline in the fourth quarter of 2018, but that’s also when some emerging markets turned the corner.

Since September 20, 2018 (near the U.S. market peak), the S&P 500 is down 8.52% (as of last Friday) and the Nasdaq 100 is down 10.17%.

But the emerging markets index is down only 0.49%. Brazil is up almost 35%. Russia is up 3.5%. China is down only 2.54%. There are some stinkers in the emerging markets over that time. Mexico is down 11.56%. India is down 6.19%. But overall, emerging markets reached their lows earlier than the United States and held up better or appreciated as U.S. stocks declined.

Emerging markets also are doing better than U.S. markets in the recent rebound. The broad emerging markets index is up 8.01% so far in 2018. China is up 8.89% and Brazil is up almost 15%. Mexico bounced 8.81% higher.

So far in 2018, the S&P 500 is up 6.35% and the Nasdaq 100 is up 7.06%.

Fundamental factors favor continued outperformance by many emerging markets.

If the Fed stops tightening monetary policy, as it indicated after yesterday’s meeting, the dollar is likely to weaken against other currencies. Many emerging market currencies already are appreciating against the dollar. The emerging market currency index of Bespoke Investment Group is well above its lows of September 2018 and has broken the downtrend that began in early 2018. Rising currencies help emerging markets as well as their economies.

Emerging economies also spent a lot of time the last couple of years fixing some problems. They improved their balance sheets, put their currencies on sounder footing and adjusted to the decline in commodities. There’s still a lot of political turmoil, but that’s normal in the sector.

The outperformance of emerging market stocks is broad-based, though Latin American stocks are doing better than Asian stocks.

Emerging market assets should continue to generate higher returns than developed economy assets as long as the U.S. and other developed countries avoid recessions.

The Data

Consumer Confidence, as measured by The Conference Board, declined to 120.0 from 126.6. The measure is down 16.2 since the November peak, the largest point decline since 2008.

While the assessment of present conditions was stable, consumer expectations declined sharply to the lowest level in more than three years. There is a sizable gap between present conditions and expectations that nears the largest in the survey’s history. Comparable large gaps between the two measures usually preceded recessions, according to Bespoke Investment Group.

The private sector created 213,000 new jobs in January, according to the ADP Employment Report. That’s well above expectations, though last month’s large jobs number was revised down a little to 263,000 from 271,000.

New unemployment claims surged to 253,000 from 200,000 (revised slightly higher from last week’s initial report of 199,000). That’s the highest number of weekly claims since September 2017. Economists have no clear explanation for the surge. Most say it is likely government workers and contractors responding to the partial government shutdown.

Labor costs continue to increase, according to the Employment Cost Index. It found total compensation increased 0.7% in the fourth quarter, compared to a rise of 0.8% in the third quarter. The 12-month gain rose to 2.9% in fourth-quarter 2018, up from 2.8% in the third quarter.

The Dallas Fed Manufacturing Survey reported a 1.0 gain in its General Activity Index, compared to last month’s decline of 5.1. The Production Index also improved to 14.5 from 7.3. Even so, new orders declined and the employment measure is at a two-year low.

The Chicago Purchasing Managers Index took a big drop to 56.7 from 63.8. New orders were at a two-year low. The report said that a major reason for the drop in new orders was the result of sellers not entering contracts because buyers wouldn’t pay their prices. This is the lowest level for the index since January 2017.

Housing prices continued their modest growth, according to the S&P Corelogic Case-Shiller Home Price Index. The index rose 0.3% for November, compared to a 0.4% increase in October. The 12-month increase is 4.7%, compared to 5.0% in the last report.

Meanwhile, pending home sales declined 2.2% after a 0.9% dip last month (which was revised higher from an initial 0.7% reported decline), according to the National Association of Realtors. This reality indicates reported existing home sales in coming months will continue to be weak. But mortgage rates declined in the last couple of months, so lower rates could bring buyers back into the market.

New home sales shot up 16.9% in November. Even so, over 12 months, sales are down 7.7% and prices are 11.9% lower. Prices declined 7.0% in November alone. The weakest region in the report was the West, which earlier had been the strongest region for some time.

The Markets

The S&P 500 rose another 1.58% for the week ended with Wednesday’s close. The Dow Jones Industrial Average gained 1.82%. The Russell 2000 added 2.21%. The All-Country World Index (minus U.S. stocks) increased 2.5%. Emerging market equities appreciated 3.61%.

Long-term treasuries rose 0.51% for the week. Investment-grade bonds gained 1.01%. Treasury Inflation-Protected Securities (TIPS) added 0.7%, while high-yield bonds gained 0.9%.

On the currency front, the dollar declined 0.63%.

Energy-based commodities rose 1.13% for the week. Broader-based commodities increased 1.35% and gold surged 2.77%.

Bob’s News & Updates

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