It’s no secret that despite the struggles faced by the U.S. stock market in 2018, Wall Street is doing phenomenally better than other major regions of the global equity market.
U.S. stocks have steadily risen since a sharp correction in early February. While neither the Dow Jones Industrial Average (.DJI) nor the S&P 500 (.SPX) have reclaimed records set in late January — the Nasdaq Composite Index (.IXIC) hit a record in June — the general trend over the past several months has been upward, and some analysts expect Wall Street to soon return to uncharted territory.
The S&P is up 6.8% so far this year, easily outpacing other major regions. European stocks (.SXPP) are down 1.4% in 2018, while Japan’s Nikkei (.N225) is off 2.5%.
The biggest divergence, however, comes with emerging markets, which have seen massive losses this year thanks to a rising U.S. dollar and uncertainty surrounding U.S. trade policy. Country-specific issues, such as Turkey’s currency crisis, have also weighed on the category. Overall, emerging markets are down nearly 10% in 2018, and nearly 20% from their recent peak.
Notably, the Shanghai Composite Index (SHCOMP) is down more than 19% this year.
The divergence between the U.S. and emerging markets stands at its widest level in more than a decade, as seen in the following chart from Bespoke Investment Group, which plots the SPDR S&P 500 ETF Trust (SPY) against the iShares MSCI Emerging Markets ETF (EEM). These are two of the most widely used exchange-traded funds that offer exposure to U.S. and emerging-market equities, respectively.
Based on Bespoke’s data, the divergence between the two is at its highest level in 14 years.
“While U.S. equities haven’t made any headway in the last seven months now, relative to the rest of the world, the U.S. is acting just fine. On a relative strength basis, SPY broke out to a new 14-year high versus EEM last week,” the firm wrote in a blog post, referring to the funds by their ticker symbols. “So, while the rangebound trading of the S&P 500 may be a bit frustrating, nothing goes up in a straight line, and things could be a lot worse.”
Recent weakness in emerging markets was related to Turkey, where the equity market has dropped by more than 50% in 2018 on the back of political instability and high levels of both debt and inflation.
“The dent to broad EM sentiment is undeniable,” wrote Richard Turnill, the global chief investment strategist at BlackRock. Despite that, he suggested this kind of divergence may not last, as emerging-market stocks could be poised to rebound.
“The risks of economic or financial contagion to other regions are low, we believe, as several of Turkey’s challenges are unique,” he wrote. “We remain wary of markets with high debt and deteriorating growth, and see long-term opportunities in regions with sound fundamentals, such as EM Asia.”
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