Week of January 27, 2014

Overseas Frenzy Spreads to the United States

Stocks took a rare thumping last week as investors worried how severely recent problems in emerging markets would impact the global economy. In what proved to be the worst week of performance for the S&P 500 since June 2012, the popular index retreated 2.6 percent with most of the negative performance taking place on the last trading day of the week. The slide in stocks may have felt particularly severe considering the S&P 500 is coming off an impressive 30 percent return in 2013 and still hasn’t experienced a correction of 10 percent or more for well over a year.

Emerging Economies in Crisis: Taper to Blame?

Currencies in many countries labeled “emerging markets” continued plummeting towards five-year lows last week, according to Bloomberg, and some believe this coinciding with a reversal in Federal Reserve monetary policy is no coincidence. To be fair, we must also keep in mind some of the countries, such as Turkey and Venezuela, have plenty of political and economic problems aside from tapering to warrant currency troubles. However, as the same problems spread to countries such as South Africa, Brazil, India, and China, investors are giving more credence to the theory that tapering may prove to be a major negative catalyst for certain countries overseas. While we can’t precisely gauge the impact Federal Reserve policy has on what’s going on overseas, it’s evident the rapid flow of capital out of emerging markets was cause for considerable anxiety for investors across all asset classes last week.

China Also Sends Sobering Signal

The second largest economy in the world may be experiencing its most important sector, manufacturing, suffering its first contraction in six months. The Purchasing Managers’ Index, (PMI), as conducted by HSBC, indicated a reading of only 49.6 for January. Any reading below 50.0 indicates a contraction in activity. According to a median estimate of 50 analysts polled by Bloomberg, China’s economy is expected to grow at a 24-year low of 7.4 percent in 2014. While a deceleration of overall economic activity is expected, these survey results were surprisingly poor. This particular index is based on the results of 85-90 percent of responses received by surveying more than 420 manufacturers, according to Bloomberg. It’s worth noting each of the last nine months, the HSBC PMI reading has registered below the official Chinese government reading on manufacturing which will be released on February 1.

Treasury Yields Back to Pre-Taper Levels

After having breached the 3.0 percent level following the Federal Reserve’s announcement to begin tapering monthly bond purchases, the 10-year Treasury yield has retreated to an eight week low. Investors are seeking refuge in U.S. Treasury bonds most likely because they fear the recent disarray of currency values and economic readings overseas. While emerging markets were popular vehicles for growth over the last several years, as developed economies struggled to find growth, they now could be a major threat to global economic growth. It will be imperative to continue to monitor these recent trends to determine whether or not this is a slight distraction or the beginning of something much larger.

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_{Securities offered through Jacques Financial, LLC (JFLLC) a Broker-Dealer, Member FINRA and SIPC. Certain associates of Joseph W. Jacques, CPA, CFP^TM are registered representatives of JFLLC. Joseph W. Jacques, CPA, CFP^TM and JFLLC are affiliated. Investment advisory services are offered through Jacques Advisors, LLC an affiliate of JFLLC. Tax services are offered through Jacques & Associates Certified Public Accountants, LLC an affiliate of JFLLC.}

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