There’s a surprising asset class that has held up a lot better than the U.S. stock market through recent market downturns. Most readers wouldn’t have guessed that I’m referring to Emerging Markets.
President Trump recently tweeted about implementing tariffs on Mexican goods, and that very day we saw a drop in Emerging Market stocks. However, since the following day on May 24th, 2019, through close on June 3rd, we’ve seen a significant shift in U.S. stock performance versus Emerging Markets.
Emerging Markets have gained 2.2%, while the S&P 500 has lost 3.1%. It’s a remarkable change, when historically a “risk-off period” usually sends high beta stocks like Emerging Markets down as much or more than Developed Markets (or more specifically—U.S. stocks).
One might think this is an anomaly. Yet it also happened toward the end of 2018. From the market peak on September 1st through Christmas Eve Day, most investors may be surprised to learn that Emerging Markets lost only about half of what U.S. markets lost.
In these cases, diversification for Emerging Markets helped cushion the blow for investors, even though historically Emerging Market stocks have been far more volatile than the S&P 500.
The real question is why? Why have Emerging Market stocks held up better during recent downturns?
It could be that the 4th quarter challenges the S&P 500 faced were purely U.S. based challenges, with one of the biggest concerns being the Federal Reserve raising interest rates too fast. Currently, the concerns about U.S. Big Tech are causing volatility.
The relative stability of Emerging Markets could also be caused by valuation. According to Morningstar, the Emerging Market Index’s PE (Price per Earnings) Ratio is 11.70 versus the S&P 500 at 16.44.
And lastly, it could be caused by investor sentiment and fund flows, which have gone the way of U.S. Large Cap versus Emerging Markets for many quarters.
The recent relative stability of emerging market performance is something to keep an eye on, and if market volatility continues in similar fashion to recent downturns, in that they are U.S. focused, Emerging Market stocks may finally offer the diversification that asset allocators have been yearning to see.
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