The catalysts that drove the Dow and the S&P 500 to their worst
monthly performances since May 2012 have not gone away. The retreat
from emerging markets — and stocks in general — appears to have more
room to run as the factors that helped propel the market to record
highs in mid-January aren't providing enough support.
Calls for a market correction have become louder, with the S&P 500
down 3.6 percent from its all-time closing high and the Federal
Reserve's announcement on Wednesday that it will keep trimming its
monthly bond buying.
More than 80 S&P 500 components are set to report earnings next
week, but the myriad issues surrounding emerging markets remain at
the forefront for investors.
"Bad news in any area of the globe is bound to make sentiment less
positive in others. This isn't an issue of contagion, but there will
be influence," said John Chisholm, chief investment officer of the
Boston-based Acadian Asset Management, which has an emerging market
equity fund with $1.2 billion in assets. "There's plenty more
While countries such as Turkey and South Africa have taken steps to
stabilize their currencies, the trend has remained negative for
The CBOE Volatility Index <.VIX>, a measure of investor anxiety,
rose 34.2 percent during January to end the month at 18.41, after
wrapping up 2013 at 13.72. The VIX remains below the long-term
average of 20, however, and has not traded above 19 since October.
For the month of January, the Dow fell 5.3 percent and the S&P 500
lost 3.6 percent — marking their worst monthly percentage declines
since May 2012. The Nasdaq fell 1.7 percent in January, its worst
month since October 2012.
It's tempting to believe that U.S. stocks are a salve for this pain.
But the reality is that when emerging markets swoon, U.S. stocks
decline as well, just not as much.
Goldman Sachs analysts wrote last week that when MSCI's emerging
markets index <.MSCIEF> falls at least 5 percent, the S&P 500 <.SPX>
tends to fall by half of that. The MSCI index has dropped 11 percent
since an October peak of 1,047.73.
"Our EM strategists believe some EM equity markets have further to
fall, and that they require significant current account rebalancing
before bottoming," Goldman Sachs analysts said in a note about their
outlook on emerging markets.
The effect on U.S. companies is harder to discern. Goldman estimated
that S&P 500 companies derive 5 percent of their profits from
emerging markets, with some sectors more affected than others.
Among the companies with large emerging markets exposure set to
report earnings next week are General Motors <GM.N> and Yum Brands
Inc <YUM.N>. Yum, in fact, gets more than half of its sales from the
"BRIC" nations — Brazil, Russia, India and China. Yum's stock lost
11.2 percent in January, while GM shares dropped 11.7 percent.
Both stocks, along with the shares of other internationally exposed
companies, have underperformed the S&P 500 since the Fed first said
it would cut back on its stimulus on December 18.
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Demand in China has been particularly sluggish, which affected Apple
Inc's <AAPL.O> results, as the company's iPhone sales were worse
than expected, and Wal-Mart Stores <WMT.N>, which closed some
locations in that country, as well as in Brazil.
Some are still looking to buy, though.
"We'd need to see more significant hits from overseas exposure
before we start paring away our allocation to those names ... GM is
doing well because of its EM exposure," Acadian's Chisholm said.
"BEST HOUSE" IN A POOR NEIGHBORHOOD
With half of the S&P 500 companies having reported earnings so far,
almost 70 percent have topped earnings expectations, above the
long-term average of 63 percent, according to Thomson Reuters data.
Two-thirds have exceeded estimates on revenue, above the historical
average of 61 percent, though companies have generally been meeting
or beating lowered expectations.
"While there are equity risks, there's very little risk from a bear
market standpoint," said Jim Dunigan, chief investment officer of
PNC Wealth Management in Philadelphia. "That markets have held on as
well as they have shows that equity appetite still exists."
Whether there is conviction behind the buying is debatable. The
three busiest days for the market in terms of the S&P's E-mini
futures contract, the most heavily traded equity futures contract,
were Wednesday, Monday, and last Friday, January 24 — all of which
Still, investors keep pouring money into stock market funds, with
$10.24 billion added in the week ended January 29, according to
Thomson Reuters' Lipper service. This marked the sixth straight week
of net new cash.
The S&P 500 is about 0.5 percent above its 100-day moving average, a
level that could provide support against further losses. According
to the most recent Reuters poll of analysts, the benchmark index is
expected to end the year at 1,925 — about 8 percent away from
Dunigan, who helps oversee $127 billion in assets, said that stocks
remain "the best house in a bad neighborhood," especially with U.S.
interest rates low.
"When you look at the alternatives, fixed income continues to look
risky, and cash doesn't help you," he said. "Unlike other asset
classes, equities will still get boosts from contributions like
buybacks, merger activity and capital expenditures."
(Editing by Jan Paschal)
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