Are U.S. Stocks More Attractive Than Emerging Markets?

By: Chris Ciovacco | Fri, Aug 22, 2014
Print Email

White House


Strong Dollar Could Alter Capital Flows

Once you invest outside the United States, the impact of currency fluctuations becomes more pronounced. All things being equal, emerging market economies would prefer to see a weak U.S. Dollar. From Reuters:

Rising rates in the United States could prompt heavy flows of investment out of emerging markets where investors flocked in search of higher returns. A stronger dollar also erodes the appeal of holding emerging market currencies. Minutes from the Fed's last meeting fueled speculation that interest rates could soon start rising and news also emerged that two Bank of England policymakers had voted for higher interest rates earlier this month.


Why Be Different When Different Is Worse?

The facts are since the second half of 2010, emerging markets (EEM) have significantly underperformed the S&P 500 (SPY). At some point, the odds and correlations tell us the trend will reverse in favor of emerging markets. However, trying to guess, forecast, or anticipate a reversal has been a painful process in recent years.

EEM:SPX Weekly Chart


Some Progress, But Hurdles Remain

According to the graph from stockcharts.com below, emerging markets and the S&P 500 have performed in a very similar manner YTD.

iShares MCSI Em Markets and S&P500 SPDRs Comparison Chart

Before we are willing to look at emerging markets more seriously from a longer-term investment perspective, we prefer to see the ratio of EEM to the S&P 500 break above the longer-term bearish trend channel shown in blue below.

EEM:SPX Weekly Chart 1


Pulling Back On The Reins

At some point, professional investors begin to question, "Am I being compensated for investing in emerging markets relative to developed markets?" One of the biggest players on the investment stage seems to be having some doubts. From Bloomberg:

Norway's $880 billion sovereign wealth fund, the world's largest, is slowing its expansion into emerging markets as it scales back a two-year mission to tap into the fastest growing markets. "We are gradually picking up some new markets but at a less rapid pace than we did at the beginning of the year," Yngve Slyngstad, the fund's chief executive officer, said yesterday in an interview after a press conference in Oslo.


Guideposts To Monitor Progress

The blue horizontal line in the chart below tells us there has been no advantage to owning emerging markets relative to the S&P 500 over the last year or so. We prefer to see evidence of an advantage before considering shifting capital out of the United States. If the EEM/SPY ratio can break above the orange box below that would be a good first step in a "prove it to me" campaign. Better yet, a break above the red box would represent a significant higher high.

EEM:SPX Weekly Chart 2


Investment Implications - The Weight Of The Evidence

With the most important event of the week, Jackson Hole, still on tap, equities have a big hurdle to cross Friday. Our allocations of stocks (VTI) and leading sectors, such as technology (XLK), remain in line with the evidence we had in hand as of Thursday's close. A positive reaction to Janet Yellen's remarks could prompt another reduction in our cash holdings

 


 

Chris Ciovacco

Author: Chris Ciovacco

Chris Ciovacco
Ciovacco Capital Management

Chris Ciovacco

Chris Ciovacco is the Chief Investment Officer for Ciovacco Capital Management, LLC. More on the web at www.ciovaccocapital.com.

All material presented herein is believed to be reliable but we cannot attest to its accuracy. Investment recommendations may change and readers are urged to check with their investment counselors and tax advisors before making any investment decisions. Opinions expressed in these reports may change without prior notice. This memorandum is based on information available to the public. No representation is made that it is accurate or complete. This memorandum is not an offer to buy or sell or a solicitation of an offer to buy or sell the securities mentioned. The investments discussed or recommended in this report may be unsuitable for investors depending on their specific investment objectives and financial position. Past performance is not necessarily a guide to future performance. The price or value of the investments to which this report relates, either directly or indirectly, may fall or rise against the interest of investors. All prices and yields contained in this report are subject to change without notice. This information is based on hypothetical assumptions and is intended for illustrative purposes only. THERE ARE NO WARRANTIES, EXPRESSED OR IMPLIED, AS TO ACCURACY, COMPLETENESS, OR RESULTS OBTAINED FROM ANY INFORMATION CONTAINED IN THIS ARTICLE.

Ciovacco Capital Management, LLC is an independent money management firm based in Atlanta, Georgia. CCM helps individual investors and businesses, large & small; achieve improved investment results via research and globally diversified investment portfolios. Since we are a fee-based firm, our only objective is to help you protect and grow your assets. Our long-term, theme-oriented, buy-and-hold approach allows for portfolio rebalancing from time to time to adjust to new opportunities or changing market conditions.

Copyright © 2006-2014 Chris Ciovacco

All Images, XHTML Renderings, and Source Code Copyright © Safehaven.com

SEARCH





TRUE MONEY SUPPLY

Source: The Contrarian Take http://blogs.forbes.com/michaelpollaro/
austrian-money-supply/