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An Unlikely Market Leader Emerges

Market Digest – Week Ending 4/11

Selling pressure in high momentum technology, biotech and consumer stocks continued to spill over into the broader market. Stocks finished lower, with the S&P 500 down 2.7%. High momentum and Small Caps suffered more severe damage. International stocks outperformed for a third straight week. Bonds and Gold rose as investors sought safer ground.

Weekly Returns:

S&P 500: 1,816 (-2.7%)
FTSE All-World ex-US: (-0.9%)
US 10 Year Treasury Yield: 2.62% (-0.11%)
Gold: $1,318 (+1.2%)
USD/EUR: $1.389 (+1.4%)

Major Events:   

  • Tuesday – Eli Lilly and Takeda Pharmaceutical were handed $9 billion in punitive damages after a U.S. jury decided they hid cancer risks of their Actos diabetes drug.
  • Wednesday – Fed officials expressed worry about the persistence of low inflation, according to minutes from the last meeting.
  • Wednesday – A bug in encryption tools used by a large chunk of the Internet, nicknamed Heartbleed, was widely announced. It could expose massive amounts of personal information.
  • Thursday – The Nasdaq Composite Index fell 3.1%, its biggest one-day slide in nearly 2½ years, dragging the broader market sharply lower.
  • Friday – JP Morgan’s first-quarter earnings tumbled 19% on weakness in trading revenue and mortgage lending.

Our Take:

Obscured by a spike in the volatility of crowd favorite stocks like Facebook, Twitter, and Tesla, an interesting trend has surfaced in Emerging Markets. At least for a few weeks, Emerging Markets stocks have tended to be very lowly correlated (even negatively at times) to US stocks. Not only that, for the first time in a while, they are leading.

Amid the carnage in the US, Emerging Markets stocks were actually up 1.3% this week and are now ahead of the broad US stock market and International Developed stocks year to date. It is hard to say exactly why, other than Emerging Markets seem to benefit, at least in perception, from falling interest rates. And US stocks and interest rates tend to move together, although not perfectly.

This short term trend could easily revert back to the longer three year pattern of Emerging Market underperformance. But it highlights the benefits of a diversified approach, like ours. Lower volatility is not only good for peace of mind—it is good for long term performance. Following any loss, it takes an even bigger gain to breakeven (on a percentage basis). It feels strange to think of Emerging Markets stocks as a vehicle for volatility reduction, but owned in the right proportion, this is exactly the role they can play.

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