The recent global stock market declines underscore how shell-shocked investors remain after the big crash of 2008 and subsequent traumas from the euro zone and the U.S. debt impasse and credit downgrade. Never mind the fact that the planet added just under $10 trillion in equity-market valuation last year, when the Standard & Poor’s 500-stock index broke records along its 30 percent ascent. The U.S. bull market has been raging for six years, having delivered a 188 percent total return to those with the intestinal fortitude to sit tight and/or stock up during its nauseating March 2009 low.
Since the autumn 2011 nadir of the European sovereign-debt crisis, the MSCI World Index has thrown off a total return of 51 percent. So we should not be surprised, or derailed, by dips, especially among emerging markets, which have taken the bulk of the recent clobbering on renewed consternation over an endgame to record U.S Federal Reserve stimulus. Instead, investors are bolting from exchange-traded funds that track emerging markets at the fastest rate on record, data compiled by Bloomberg show.
“It seems obvious that after being up so much last year and in 2012, the market would have to take a breather at some point,” says Jenny Van Leeuwen Harrington, chief executive officer and portfolio manager at Gilman Hill Asset Management. “Use whatever excuses you may, exhaustion is probably the reality. While for my clients’ sakes, I hate to see equity markets lose ground, as a value investor, I love a correction the way normal girls love a sale at Saks.”
Van Leeuwen Harrington has been sitting on cash from a recent sale of a core holding and is finding stocks she had on her buying shortlist at compelling valuations. According to Gilman Hill, the forward price/earnings ratio on the S&P 500 is at 15.4 and—despite stocks’ record run—still lags the 15-year average of 16.2. The nearly two dozen Wall Street strategists tracked by Bloomberg predict, on average, that the index will gain 11 percent from here.
Even so, there is a sense of fear that a contagion out of developing economies will reach the West. The MSCI Emerging Markets Index has slumped to a five-month low, with pain concentrated in such places as India, Russia, Brazil, and Mexico. A basket of the 20 most-traded emerging-market currencies has fallen about 2 percent this year. Russia, on Olympic tenterhooks, had to spike a bond auction for a second straight week after yields on the nation’s bonds maturing in 2028 soared to record highs.
Argentina’s peso tumbled as its central bank cut dollar sales to husband international reserves that are at a seven-year low. The central banks of India, Turkey, and South Africa are hastening to raise interest rates in defense of their currencies; Argentina’s peso fell 19 percent last month, while South Africa’s rand plunged 5.7 percent and Russia’s ruble dropped just under 7 percent.
To what extent will this newfound weakness from an erstwhile pocket of economic strength derail the hesitantly growing (and far bigger) economies of the West and Japan? To what extent will unnaturally low interest rates in the home markets of the world’s majority of investors continue to push money into all manner of equities, developed and developing?
Earnings in the MSCI All-Country World Index are forecast to jump 17 percent this year and 11 percent in 2015 and 2016, according to analyst forecasts tallied by Bloomberg. “It is a world of cycles,” says Joshua Scheinker, a senior vice president with Janney Montgomery Scott in Baltimore. He says that going into the end of 2013, his retail clients were calling to bump up their portfolio risk, against his advice. (Fair point: My mother called last week to urge me to buy Facebook shares.)
“So, yes,” says Scheinker, “this correction is normal, and as painful as they all feel they are just part of the market cycle and a healthy pause in a bull market. This short-term bearishness will pass, and we believe the uptrend will continue.” He described keeping J.P. Morgan research on his desk to remind him that despite average intra-year drops of 14.4 percent, the market has enjoyed positive annual returns in 26 of 34 years.