Investors may crave a quiet market this coming week to digest the recent volatility in stocks and rehash today’s Super Bowl, but the prospect does not look likely.
The catalysts that drove the Dow and the S&P 500 to their worst monthly performances since May 2012 have not gone away. The retreat from emerging markets — and stocks in general — appears to have more room to run as the factors that helped propel the market to record highs in mid-January are not providing enough support.
Calls for a market correction have become louder, with the S&P 500 down 3.6 percent from its all-time closing high and the US Federal Reserve’s announcement on Wednesday that it will keep trimming its monthly bond buying.
More than 80 S&P 500 components are set to report earnings in the week ahead, but the myriad issues surrounding emerging markets remain at the forefront for investors.
“Bad news in any area of the globe is bound to make sentiment less positive in others. This isn’t an issue of contagion, but there will be influence,” said John Chisholm, chief investment officer of the Boston-based Acadian Asset Management, which has an emerging market equity fund with US$1.2 billion in assets. “There’s plenty more instability ahead.”
While countries such as Turkey and South Africa have taken steps to stabilize their currencies, the trend has remained negative for those assets.
The CBOE Volatility Index, a measure of investor anxiety, rose 34.2 percent last month to end the month at 18.41, after wrapping up last year at 13.72. The VIX remains below the long-term average of of 20, however, and has not traded above 19 since October.
Last month, the Dow fell 5.3 percent and the S&P 500 lost 3.6 percent — marking their worst monthly percentage declines since May 2012. The NASDAQ fell 1.7 percent last month, its worst month since October 2012.
It is tempting to believe that US stocks are a salve for this pain, but the reality is that when emerging markets swoon, US stocks decline as well, just not as much.
Goldman Sachs analysts wrote last week that when MSCI’s emerging markets index falls at least 5 percent, the S&P 500 tends to fall by half of that. The MSCI index has dropped 11 percent since an October peak of 1,047.73.
“Our EM strategists believe some EM equity markets have further to fall, and that they require significant current account rebalancing before bottoming,” Goldman Sachs analysts said in a note about their outlook on emerging markets.
The effect on US companies is harder to discern. Goldman estimated that S&P 500 companies derive 5 percent of their profits from emerging markets, with some sectors more affected than others.
Among the companies with large emerging markets exposure set to report earnings next week are General Motors (GM) and Yum Brands Inc. Yum, in fact, gets more than half of its sales from the “BRIC” nations — Brazil, Russia, India and China. Yum’s stock lost 11.2 percent in January, while GM shares dropped 11.7 percent.
Both stocks, along with the shares of other internationally exposed companies, have underperformed the S&P 500 since the Fed first said it would cut back on its stimulus on Dec. 18.
Demand in China has been particularly sluggish, which affected Apple Inc’s results, as the company’s iPhone sales were worse than expected, and Wal-Mart Stores, which closed some locations in that country, as well as in Brazil.