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Content for this page, unless otherwise indicated with a Fidelity pyramid logo, is published or selected by Fidelity Interactive Content Services LLC ("FICS"), a Fidelity company with main offices in New York, New York. All Web pages that are published by FICS will contain this legend. FICS was established to present users with objective news, information, data and guidance on personal finance topics drawn from a diverse collection of sources including affiliated and non-affiliated financial services publications and FICS-created content. Content selected and published by FICS drawn from affiliated Fidelity companies is labeled as such. FICS selected content is not intended to provide tax, legal, insurance or investment advice and should not be construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any security by any Fidelity entity or any third-party. Quotes are delayed unless otherwise noted. FICS is owned by FMR LLC and is an affiliate of Fidelity Brokerage Services LLC. Terms of use for Third-Party Content and Research.

Global woes fail to send cash into U.S. stocks

Further selloff could put stocks on track for correction.

  • By Tomi Kilgore and E. S. Browning,
  • The Wall Street Journal
  • – 01/26/2014
  • Domestic Stocks
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The emerging-world tumult that rattled global markets last week is prompting investors to take a fresh look at their portfolios. But so far few are responding to the shakeout by seeking shelter in U.S. stocks, a sign that markets around the globe likely face further turmoil.

A further selloff could put the U.S. stock market on track for its first so-called correction — typically defined as a pullback of at least 10% — since the euro crisis of 2011. The emerging-market unrest makes such a decline likelier, some say, given headwinds such as uneven economic growth and receding central-bank support.

"We came into the year thinking 2014 would be a much more challenging year for investors," said Bruce Bittles, chief investment strategist at Robert W. Baird & Co., with $105 billion under management.

He said he has been expecting a "stiff correction of 10% to 20%" sometime in 2014, reasoning that stocks have risen too far given the likely path of earnings and economic growth. He is waiting for stocks to extend their decline before adding to his holdings.

The stocks, bonds and currencies of developing countries including Turkey, South Africa and Brazil have been hammered in recent days. The problem is that a wide range of emerging-market countries are having trouble adapting to a softer world economy. Until they make some deep economic adjustments, investors and analysts say, their markets could face continued selling.

Many investors say U.S. stocks eventually will benefit as retreating money managers look for a safer place to invest. Few expect a slowdown in China or market turmoil in places like India and Argentina to hit the U.S. economy or corporate profits. U.S. consumers could benefit as commodity prices fall as a result of lower Chinese demand, Fidelity Investments said last week in a note to clients.

Even so, many investors are saying they would prefer to wait for lower prices before buying again. The uproar in developing-country markets hit U.S. stocks hard last week, with the Dow Jones Industrial Average (.DJI) tumbling 3% over two days to its worst weekly loss in more than a year.

Joseph Quinlan, chief market strategist at U.S. Trust, Bank of America Private Wealth Management, with $333 billion in assets under management, expects the upheaval in emerging markets to benefit U.S. markets — though he also isn't buying yet.

"All these problems in the emerging markets make the U.S. more attractive," Mr. Quinlan said. "If we got a 5% to 8% pullback, we'll be putting more money to work in equities."

In 2013, of course, investors looking for a correction were proven wrong time and time again as the Dow powered to a 26.5% rise. With the declines last week, the Dow is 4% below its recent high.

Now a number of factors are seen as laying the groundwork for a pullback. With the Federal Reserve taking its first step toward scaling back its unprecedented efforts to support the economy, some investors see the easy-money tailwind diminishing.

Valuations, meanwhile, look stretched, many say.

Wayne Kaufman, chief market analyst at New York-based brokerage Rockwell Securities, points to the price of the S&P Composite 1500 index, which covers approximately 90% of U.S. market capitalization. At the end of 2013, it was 18 times the earnings of its components, up 20% from a year earlier.

"We can't expect that to continue," he said.

To be sure, while earnings haven't been strong enough to push stocks higher, they haven't been disastrous. With a quarter of S&P 500 (.SPX) companies having reported results through Thursday, earnings are on track for a 6.4% rise from last year, compared with forecasts for a 6.2% increase just before the start of earnings season.

And the scale and timing of any investor shift out of emerging markets is uncertain. A large-enough selloff overseas may push money around the globe out of stocks and into lower-risk bonds, hurting share prices everywhere. Even if investors do put funds to work in the U.S., other factors could offset those gains and leave stocks treading water.

That said, the picture for U.S. markets appears much more upbeat than for many developing countries.

Richard Bernstein, chief executive of Richard Bernstein Advisors, which oversees $2.1 billion in New York, says he has worried for some time that expectations for developing-country securities were too high. He thinks the trouble in emerging markets is symptomatic of deeper economic problems and that emerging-market stocks and bonds will fall further.

"People thought that emerging-market growth was something special," said Mr. Bernstein. "They are learning it was fueled by the credit bubble, which is now deflating."

Manoj Pradhan, global emerging-market economist at Morgan Stanley in London, has been warning clients for months not to jump back into the stocks and bonds of most developing countries. It is still too soon, he says.

"The weakness that we have seen in asset prices and continue to see in asset prices is inevitable," he says.

Some see declines as likely in the U.S. as well, at least in the near term. John Kosar, director of research at Asbury Research, points to the S&P 500's drop below 1814 on Friday — a level it broke through last year only on Dec. 20. Many investors who bought since then are now likely losing money, Mr. Kosar said.

"That's the pressure point for the market," Mr. Kosar said. "If you push on it, people feel pain. And when people feel pain, they sell."

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Content for this page, unless otherwise indicated with a Fidelity pyramid logo, is published or selected by Fidelity Interactive Content Services LLC ("FICS"), a Fidelity company with main offices in New York, New York. All Web pages that are published by FICS will contain this legend. FICS was established to present users with objective news, information, data and guidance on personal finance topics drawn from a diverse collection of sources including affiliated and non-affiliated financial services publications and FICS-created content. Content selected and published by FICS drawn from affiliated Fidelity companies is labeled as such. FICS selected content is not intended to provide tax, legal, insurance or investment advice and should not be construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any security by any Fidelity entity or any third-party. Quotes are delayed unless otherwise noted. FICS is owned by FMR LLC and is an affiliate of Fidelity Brokerage Services LLC. Terms of use for Third-Party Content and Research.
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