Markets all over the world have fallen… except in the U.S., that is.
Take a look at the chart below. If you’re invested in the U.S., you’re doing just fine. But otherwise, you’re hurting.
As shown in the graph above, emerging markets, as measured by the MSCI Emerging Markets Index, are down 18.1 percent since recent highs in January. European shares, as measured by the MSCI Europe Index, are down 10.7 percent from recent highs. And China (represented by the MSCI China Index) is down 22.4 percent. The S&P 500, though, is down only 0.8 percent.
As the Financial Times explained recently, “Emerging markets tumbled by the most in six months on Wednesday, slumping into a bear market as investors were spooked by a commodity price rout, currency turmoil and disappointing results from one of China’s technology giants.”
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It takes a lot of rainfall for the dam to burst… In this case, it’s easy to blame Turkey as the latest storm, but there’s been a lot more going on.
The Financial Times goes on to explain, “Emerging markets have faced mounting pressure over the past few months. Concerns over trade wars have weighed heavily, while rising U.S. interest rates and the U.S. dollar’s renaissance have dented the lustre of emerging markets, and contributed to crises in more vulnerable countries which are dependent on capital inflows, such as Argentina and Turkey.”
So despite Thursday’s rally, things might feel bleak. But I’ll remind you of a few things…
Corrections happen. Emerging market corrections (except for Turkey and a small handful of other countries, this isn’t close to the threshold of “crisis”) are a dime a dozen.
Since the end of the Global Financial Crisis, the MSCI Emerging Markets Index has fallen 20 percent or more at least three times (compared to zero for the S&P 500).
A market correction is painful, and can make a big, temporary dent in your portfolio. What can you do? See below.
Contagion makes it worse. There’s reality… and then there’s a new reality once the concerns about one market or economy spread to others (you’ll see this referred to as “contagion”).
For example: Investors are concerned that since one shaky currency in one shaky economy is falling (the Turkish lira), the currencies of other economies exhibiting similar characteristics might also decline (Argentina, South Africa)… so investors sell the currencies of these other countries, thereby creating the decline that they were fearing. That’s how investors suddenly seeing the world through a dark lens create that very world.
China is actually doing all right. So far, China’s economy seems to be holding up through the tougher trade environment. The U.S.-China trade war (which we’ve written about here) is now entering its fourth month.
So far, the Chinese economy seems to be doing all right anyway. Trade figures just released this week showed that exports rose by 12.2 percent year-on-year in July, while exports jumped by over 27 percent during the same period (a weaker currency is helping). Retail sales rose 8.8 percent in the month of July. The Purchasing Manager’s Index – a key indicator of factory activity – weakened very slightly to 51.2 from 51.5 in June (anything above 50 indicates expansion).
A new round of trade talks between the U.S. and China is scheduled for later this month. But the last trade talks between China and the U.S. were a complete failure, and there’s no reason to believe the outcome this time around will be significantly different.
The trade war makes investors sell first and ask questions later, though. And that’s true both outside of China, as well as inside of China… and much of Asia’s stock trading is dominated by Chinese investors throughout the region. And as we explained recently, the traditional Ghost Month in the Chinese lunar calendar has many investors keeping to the sidelines until after August.
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What should you do now?
When the value of your portfolio drops by 15 percent in a matter of days, it’s easy to panic. But instead…
Watch your stop-loss levels. Occasional losses are a reality of investing, but many investors suffer larger losses than necessary because they hold on to their losers.
So it’s important to have a disciplined approach to selling your bad positions. Losing the battle is far better than losing the war and having a few bad stocks wipe you out altogether.
The key to not losing money isn’t to wait for the rebound – because it often doesn’t come, ever. The key to not losing money is to sell before you feel the need to wait for a rebound. The best way to do this is to use a trailing stop (which we explain here).
Hold cash. Holding cash is one of the easiest ways to hedge your portfolio. It lets you pick up “money lying in the corner” especially from opportunities that may arise from market selloffs like we’re seeing today.
Yes, holding cash doesn’t pay much, and its value erodes over time (due to inflation). But higher cash allocation in your portfolio for the short-term – like the next year or so – will shield you from a market crash or extended decline, and allow you to profit from any great investment opportunities that may come up.
Look for value. When it comes to investing, buying the cheapest markets is almost always better than buying expensive ones. And it offers a good hedge to risk during times of volatility.
You see, cheaper markets have far more upside than expensive markets. And when markets fall, the cheapest markets tend to fall less than expensive ones.
While there’s no assurance that cheap markets won’t get cheaper, holding a basket of the most undervalued markets can offer some counterbalance to portfolios with significant exposure to overpriced markets such as the U.S.
Publisher, Stansberry Churchouse Research