Overview
- The market selloff continued last week, and emerging markets stocks are looking more uncertain in the short term.
- With U.S. wages under pressure, consumer-related stocks remain an unattractive option.
- The Federal Reserve's tapering program is starting to remove a pillar of support for stocks.
Market Selloff Continues
The sharp decline in equity markets endured for a second week, with investors again reacting to tension in emerging markets (EMs) and mixed U.S. economic data by seeking out safe-haven assets. For the week, the Dow Jones Industrial Average declined 1.1% to 15,698, the S&P 500 Index dropped 0.4% to 1,782 and the Nasdaq Composite fell 0.6% to 4,103. Factoring in these losses, U.S. stocks lost close to 4% in the first month of the year. Action in fixed income markets also echoed the previous week, with Treasury yields falling (and prices correspondingly rising). For the week, the yield on the 10-year Treasury dropped from 2.86% to 2.64%.
Turmoil Causes Investors to Flee Emerging Market Stocks
Amid continued downward pressure on their currencies, several emerging market countries raised their benchmark interest rates last week in an effort to provide support. Most notably, the Turkish central bank increased rates from 7.75% to 12%, a much more aggressive move than expected. Central bankers in India and South Africa also raised rates, but in a much less dramatic fashion.
Although emerging market equities are inexpensive (they trade at a 40% discount to developed market stocks), investors continue to view the asset class as risky and are selling down their exposures at a rapid clip. Last week brought the 14th consecutive week of outflows from EM funds and also marked the single-largest weekly outflow since August 2010. Looking ahead, we expect the combination of U.S. Federal Reserve tapering (which reduces overall global liquidity) and high debt levels in many EM countries will keep volatility high. While we do see good long-term value in emerging markets, near-term volatility suggests a more cautious stance is warranted in the shorter-term. As such, we would still be cautious about adding new positions to EM equities.
Without Wage Growth, the U.S. Economy to Remain Shaky
Although investor attention has been focused on emerging markets, certain news from the U.S. also has contributed to souring sentiment. Following a period during which economic data mostly surprised to the upside, the tone has become more mixed in recent weeks.
On the positive side, the U.S. economy ended 2013 on a strong note, with gross domestic product growing at an annualized rate of 3.2% in the fourth quarter. Other reports, however, are painting a more negative picture. Durable goods orders plunged 4.3% in December and November's figures were revised sharply lower. More troubling was December's personal consumption and income data, which showed that although consumers continued to spend, that spending came alongside a lower savings rate (that rate fell to an 11-month low of 3.9%). At the same time, wage growth remains elusive. Disposable income was flat in December and is up only 2.3% on a year-over-year basis, the slowest rate of growth since 2010.
The takeaway from all of this is that while consumer spending is still rising, that spending is coming from savings rather than from increases in wages and income—an unsustainable trend. Unless the pace of wage growth accelerates, spending will eventually slow, which would act as a drag on the broader economy. From an investment perspective, we would suggest this backdrop justifies a negative view toward consumer-related stocks.
Fed Tapering Is Removing a Pillar of Support
In addition to the aforementioned hiccups, investors also are digesting the details from last week's Fed meeting. As expected, the Fed announced it would reduce the size of its monthly asset purchases by an additional $10 billion (from $75 billion in January to $65 billion), continuing the tapering process it began last month. In our view, the central bank's quantitative easing program was effective in helping to stabilize financial markets, but it did not accomplish its stated goal of strengthening the labor market.
The Fed's actions were not unexpected and represent a step in the direction of less-easy monetary policy. Although policy is by no means tight, and the Fed is committed to keeping short-term rates near zero for the foreseeable future, tapering does mean that Fed policy is less of a tailwind for stocks than it was in past years. As such, equity markets will need to rely more on fundamentals and less on Fed policy to continue to make gains.
This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of February 3, 2014, and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Investment involves risks. International investing involves additional risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. The two main risks related to fixed income investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and interest payments. Index performance is shown for illustrative purposes only. You cannot invest directly in an index.
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