Tahoe Market Pulse: There are better days ahead
August 24, 2016
The market has made new highs, but not all sectors participated. Utilities and telecoms have given a little ground — another bout of profit-taking — as investors and speculators moved into riskier stocks.
We've seen that before. What we have not seen in a long time are key trends that bode well for future economic and profit growth … and inevitably stock prices. I see some now.
The emerging markets have been and will be the engines of global growth. Without them the world economy won't go far given sluggish or no growth in Europe and Japan.
The iShares Emerging Markets ETF (symbol EEM) bottomed near 27 six months ago, now it's 37. The sharp move higher tells me there is a change coming, a positive one.
Better times for emerging economies will only occur if their customers (developed economies) import more commodities, raw materials, and in some cases finished goods.
iShares USD Emerging Markets Bond ETF (symbol EMB) follows an index of emerging market sovereign bonds. It has also done well since early this year (plus 15 percent).
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There are two reasons. First, as economic growth in emerging economies picks up, which the rise in EEM implies, governments will be better able to service and repay their debt.
The second reason is that sovereign debt is tied to global interest rates and they have been falling as central banks worldwide coordinate easy monetary policies.
Almost one-third of all sovereign debt has a negative yield, and on average the sector yields 0.56 percent compared to 4.4 percent for emerging market debt. Institutional investors are finding the latter compelling amid an improving economic and financial environment.
U.S. junk bonds are a bet on the economy far more than the level and direction of interest rates, the main factors that determine investment-grade bond prices.
The SPDR Barclays High Yield Bond ETF (JNK) is 16 percent above its February low. That means investors are increasingly confident in corporate America's ability to service and redeem its debt. Perhaps they are taking a cue from the stronger picture for emerging markets and what that implies.
Connect the dots. These trends and significant rallies underscore a growing optimism for improving conditions here and overseas, one too large to be fueled by speculators alone
Soon enough that will be reflected in the still-muted outlook for corporate profits, and the recent rise in stock prices is in anticipation of that. Bottom line: There are better days ahead.
David Vomund is an Incline Village-based fee-only money manager. Information is found at http://www.VomundInvestments.com or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial adviser before purchasing any security.
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