Market Digest – Week Ending 4/10
Stocks welcomed a relatively slow news week. The S&P 500 rose 1.7%. The US Dollar resumed its climb, but International Stocks outperformed anyway. Emerging Markets gained 4.1%, driven in part by rising share prices in China. More big mergers were announced. Shell will purchase BG group for $70 billion, FedEx agreed to buy TNT for $5 billion, and Mylan offered to buy generic drug maker Perrigo for $29 billion.
S&P 500: 2,102 (+1.7%)
FTSE All-World ex-US: (+2.3%)
US 10 Year Treasury Yield: 1.95% (+0.04%)
Gold: $1,208 (+0.6%)
USD/EUR: $1.060 (-2.6%)
• Monday – Virtu Financial, a high speed trading company like the ones vilified in Michael Lewis’ Flash Boys, announced plans to IPO with a market cap over $2.5 billion.
• Monday – Universal Pictures’ Furious 7 brought in $146 million over the weekend, making it the 9th biggest opening weekend ever.
• Tuesday – US benchmark oil prices hit a high for 2015 after a prediction that supply would begin to decline in June.
• Tuesday – HBO’s standalone streaming service became available for Apple TV users. It will be available more broadly in the coming months.
• Wednesday – Fed meeting minutes revealed members were split about the prospect of an interest rate increase in June.
• Wednesday – Shell announced it will buy BG Group for about $70 billion.
• Friday – GE said it would divest most of GE Finance. Shares rose.
• Friday – The Apple watch was made available for sale, but is generally expected to take 4-6 weeks for delivery.
International Stocks are outpacing US Stocks so far in 2015, but Emerging Markets had been lagging Developed Markets. That changed in the last two weeks as Emerging Markets as a whole have shot up about 7% so far in April, passing Developed Markets for the year in the process.
Much of that is attributed to China and Hong Kong, which now make up 19% and 7% of VWO, a popular Emerging Markets ETF. The Shanghai Composite Index has nearly doubled in the last nine months, and new rules allowing mainland Chinese to buy stocks in Hong Kong has led to a spike there.
Investors in China take a much more speculative attitude and are more likely to use leverage than US investors. That, along with more impactful government regulation, can lead to higher volatility and makes trying to time market moves even more difficult.
Some have taken to betting against what they view as an overinflated market in China, and it’s been painful. For long-term US investors, we generally recommend about 30% of equity allocations be invested overseas.
And of that, we believe somewhere around a third should be in Emerging Markets. That means about 10 of overall stocks would be in Emerging Markets, with about a quarter of that in China. If periodically rebalanced back to target weight, this approach creates the potential to benefit from volatility – both the good kind China has experienced lately, and the inevitable reversal at some point.