Stocktake: Investors urged to grin and bear yo-yo market
Emerging market stresses may be the story de jour
Pullback, correction or bear market? Market selling unnerved investors, who just weeks ago were assuming another year of strong gains.
Japan’s Nikkei, the star of 2013, is down 14 per cent since December 30th. Last week, it broke its 200-day moving average for the first time since markets began pricing in Abenomics in late 2012.
It’s trading at levels seen last May, as is the Dow Jones Industrial Average, which also breached its 200-day average for the first time in over a year.
The S&P 500 last week fell 2.7 standard deviations below its 50-day average – the most technically oversold condition in 14 months.
Still, despite the agonising over emerging markets, and the hyperbole about a $3 trillion global stock “wipeout”, the MSCI world index has fallen by less than 6 per cent.
It may get worse, but four-month lows are not cause for panic. Money manager and blogger Josh Brown puts it well: “If a correction of between 10 and 20 per cent is unbearable to you mentally or financially, that means you’ve either got more money than you should invested in stocks or you’re kind of a fairy.”
Mind the gap
Emerging market stresses may be the story de jour, but the issue has been bubbling away for some time now.
MSCI’s emerging markets index fell 5 per cent last year, even as the S&P 500 soared 30 per cent. Even before the recent sell-off gathered steam, Merrill Lynch said sentiment was close to capitulation, with the percentage of investors underweight in emerging markets two standard deviations below its 10-year average. There have been 14 consecutive weeks of outflows from emerging market funds – the longest streak since 2002 – with the largest weekly outflow since August 2010 recently recorded.
Can it get worse? Yes – 2001 saw a streak of outflows almost twice as long.
At some stage, however, valuations will make investors pause. MSCI’s emerging index trades at nine time forward earnings, below its 10-year average of 11. Developed markets trade on 15 times earnings, above their long-term average of 13.
The valuation gap is at its widest since October 2008. That gap will narrow, the only question is when.
Macro factors are big picture
2013’s lacklustre earnings didn’t prevent US markets from roaring higher. Now markets are retreating, just as the earnings picture improves.
So far, 74 per cent of companies have beaten earnings estimates; 67 per cent surpassed revenue estimates; growth estimates are being revised higher. Bespoke Investment Group notes the average stock has gained 0.39 per cent on its report day, despite the wider sell-off. In other words, markets are being driven by macro, not micro factors. That stocks are rising on report days, suggests Bespoke, “is a good sign for the long-term health of the market”.