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.
Source: Yahoo! Finance
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.
Source: FactSet; Bloomberg
Purchasing Managers Index (PMI) is an indicator of the economic health of the manufacturing sector. The PMI index is based on five major indicators: new orders, inventory levels, production, supplier deliveries, and the employment environment.
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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* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investments may be appropriate for you, consult with your financial advisor.
* The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.
* The 10-year Treasury Note represents debt owed by the United States Treasury to the public.
* The Dow Jones Industrial Average is an unmanaged group of securities demonstrating how 30 large publicly owned companies have traded and cannot be invested into directly.
* Indexes are unmanaged, statistical composites and their returns do not include payment of any sales charges or fees an investor would pay to purchase the securities they represent. Such costs would lower performance. It is not possible to invest directly in an index.
* Past performance does not guarantee future results.
* Charts and graphs should not be relied upon as the sole basis for any investment decision and are for general informational purposes only.
* The prices of small cap stocks are generally more volatile than large cap stocks.
* Consult your financial professional before making any investment decision.
* This newsletter was prepared by CWM, LLC.
* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.