Thoughts on Current Market Events: Emerging Markets & Stimulus Wind Down

As sexy as "stimulus" sounds, investors are starting to worry what impact the pulling back of quantitative easing (the Fed's way of stimulating the economy by keeping interest rates low) will have on the markets, both in the U.S. and abroad. Easing up on stimulus should be a good thing, a sign that the economy is doing better, that the unemployment rate is improving, that roses are starting to sprout, and the sun is beginning to shine. But, of course, for every action, there is an equal and opposite reaction (thanks, Mr. Newton), so fears abound.

Pulling back on quantitative easing will likely mean an increase in interest rates here in the U.S. Generally, when Treasury rates rise, other interest rates, including mortgage loans and credit cards, go up, too. Part of the fear here is that the U.S. economy is still fragile. For example, while the unemployment rate has fallen to 6.6%, millions of people have been unemployed for so long that they have stopped looking for work; they are not included in that 6.6%. All told, the labor participation rate is only 63%, according to the Washington Post, the lowest it's been in a generation. Home sales are volatile at best. Consumer spending has been on the rise, but is nowhere near what it was pre-recession. The American middle class is slowly dwindling, which is displayed most simply in the consumer sector, where high-end luxury brands such as Kate Spade and Michael Kors, and low-end retailers like Dollar Tree, are vastly outperforming middle-of-the-roads like Abercrombie & Fitch.   

If interest rates rise too quickly, it could send the U.S. economy into a downward spiral. Credit card interest rates are already high, so consumers could be crippled by higher rates. High gas prices will only compound this effect. High food and health care costs would only make things worse.

Globally, the effect of relieving QE was witnessed recently. When the Fed announced its confidence in the U.S., investors fled emerging markets and ran straight into the arms of U.S. Treasuries. The run-up in the U.S. stock market over the past few years has taken a toll on emerging markets. EM stocks lost 5% in 2013, according to MSCI. EM sovereign debt performed similarly poorly. Leaders abroad have expressed concern about what continued easing will do to their countries' currencies, exports, and inflation levels. 

I like to think of myself as a contrarian investor, as following the crowd rarely leads one to buy low and sell high. That said, I think it's a great time to invest in emerging markets equities while prices are low relative to U.S. stocks. Keep in mind that, as quantitative easing is unwound more and more, EM stocks will likely get more volatile. In the end, I think it will be worth the wait. I'm of the belief that developing countries will not be wiped off the map, that they will continue to grow as time passes. 

I've expressed in previous posts that I don't think the record U.S. stock market levels are sustainable, as they do not reflect the true underlying health (or lack thereof) of the economy. (In fact, the S&P 500 just reached a new high today of 1,853.38.) I expect that they will come down as QE ends. Over time, investments in emerging markets may set off U.S. and other developed markets' losses. 

Shutdown that Debt Ceiling!

Dear Readers,
It's been over a month since I wrote a post -- what a crazy month! I've had several job interviews, so I've been crazy busy preparing for those, and I'm making great strides on the creative writing project I'm working on. That being said, what a crazy time in the markets this past month! Actually, I should state that more accurately: what a crazy time in the government this past month!

The U.S. government officially shut down on Tuesday, October 1 since Congress and the White House couldn't come to an impasse on funding Obamacare (which has already been made a law and been defended by the Supreme Court). This means that a lot of services are not available, national parks are closed, and, most unfortunately, some people are not getting the public assistance they rely on.

The shutdown is a big deal, but the market didn't really react to it, implying that investors don't really think it's a big deal. Consensus seems to be that it's about the egos of the leaders of the Republican party, primarily. I agree with that on one hand; however, the country is not run by Republicans alone, so Democrats are not innocent in this debacle. But, politically, the fallout appears to have wounded the reputation Republicans much more -- it's approval rating is at just 28%, the lowest in the history of Gallup polling (which, to be honest, isn't all that long; they've only been polling this for 21 years). This could certainly favor Democrats in the next round of elections, but that's over a year away. It could have the most positive impact on the Democratic presidential candidate. Favorable buzz is already beginning to swarm around Hilary Rodham Clinton for her possible run in 2016.

But back to the markets. As I said, the markets didn't even flinch at the shutdown. BUT it freaked out at the possibility of the U.S. hitting the debt ceiling and defaulting on its obligations. Default means that interest rates will rise rapidly because, suddenly, the U.S. has become riskier and investors demand to be compensated for risk.

The rest of the world is on edge about how the U.S. will resolve this issue because U.S. Treasury rates effect so many other rates around the world, and many holders of Treasuries live outside of the U.S. Actually, the Chinese government is the largest U.S. creditor, holding $1.3 trillion of Treasuries. As a result, officials in Beijing have stressed, like a mother of arguing siblings, that the U.S. had better figure itself out sooner rather than later.

Congress and the White House have only 3 days, until October 17, to come to a consensus. Needless to say, political agendas should not put the world markets in jeopardy. Now, the world waits to see who will be the bigger person in government.