While the U.S. markets have seen reduced breadth and increased volatility over the last month, there are pockets of strength overseas that are worth investigating.
But first, let’s recap the recent action in the U.S. to highlight why it makes sense to broaden your exposure to other markets.
My work shows that strong earnings are the primary driver of a stocks upward move so we’ll begin with a review of 2nd quarter earnings for this year where strong earnings reports were met with selling.
Using the S&P 500, it was a very healthy reporting season recently with close to 75% of companies coming in with earnings that were an average of 6% above estimates. That’s well above the average over the last five years. In addition, estimates for earnings going forward were revised upward for more companies then average as well. While these strong earnings would normally propel the reporting company’s stock higher, almost half declined in price following their positive reports. In my over 25 years of closely following stocks, when the markets shrug off strong earnings, this is not a positive sign.
Other negative signs can be seen in the sharp decline in Small Cap stocks with the Russell 2000 Index now 5.6% below its recent highs. In a healthy market environment, these riskier stocks generally go up in a sign of investor confidence in the markets.
Lastly, we are in a seasonally weak period of the markets when traders take time off which creates lower volume rates and makes stocks more susceptible to sharp swings. Add conflicting headlines out of Washington and any geopolitical instability and you have the conditions for a fragile market prone to failure.
While the markets may very well resume their strong near-term uptrend in the coming months, it makes perfect sense in the meantime to put some of your money to work in other areas less impacted by the factors we’ve discussed for the U.S. markets.
Let’s look at the Emerging Markets which are defined as a country that has some characteristics of a developed market but doesn’t meet the standards to be a developed market. While there are close to 10 countries that are considered emerging, China and India have the largest economies. They also have the largest growth prospects and hence are currently the most attractive. (see chart below)
Investors can invest in these and other Emerging Markets through ETF’s which can be either country specific or a pooled fund that invests in several countries. Two of the most popular are Vanguard’s Emerging Markets ETF (VWO) followed by iShares MSCI Emerging Market (IEMG). I point these out because their popularity makes them more liquid and they have very low expense fees.
VANGUARD FTSE EMERGING MARKETS ETF
You can find a full listing of Emerging Market ETF’s using this link here. From there, you can do a search for specific countries and then examine their charts for confirmation that they are in a buyable position within an uptrend. While many have done well year-to date already, healthy growth prospects going forward as well as continued weakness in the U.S. Dollar should continue to propel many of these ETFs higher.
Lastly, there are other ways to play the growing economies within these Emerging Markets and that can be with commodities such as Copper which are used extensively in building. News from China that they may be halting exports of Copper by year-end are also boosting shares of this metal.
As with any investment, you will want to pay attention to the chart and have news alerts that will inform you of a potential shift in investor sentiment. To find out more about my work, please visit my website using this link. For those interested in a special trial offer of my top performing newsletter you can email me directly for information at MaryEllen@theMEMgroup.com.
Mary Ellen McGonagle
President, MEM Investment Research
Mary Ellen has over 25 years of experience advising professional money managers on stock selection as well as providing broader market guidance. For over 15 years she was a Vice President at William O’Neil & Co. where she worked closely with fund managers around the world.