In recent years, stocks in emerging markets have garnered significant attention, yet indications suggest that this upward trend may be losing steam. So far this year, the MSCI Emerging Markets Index has declined by 1.7% when measured in dollar terms. However, for one wealth manager, the performance of this index—whether it finishes positively or negatively—holds little significance. Jeffrey Troutner from TAM Asset Management is reconsidering the strategic role of emerging markets stocks in portfolios. In an interview featured in the January 2007 issue of Wealth Manager, Troutner expressed that emerging markets have fallen short of expectations over the long term. This perspective is particularly striking coming from an early advocate of this asset class since the mid-1990s. To dive deeper into his insights, we recently spoke at length with Troutner, and selected excerpts were published in the January edition of WM. You can read along here….
Throughout 2006, your editor often expressed disappointment over the lack of attractive buying opportunities across asset classes. However, based on January’s developments, 2007 may prove more favorable for long-term investors seeking bargains.
Our accompanying table shows that losses are accumulating this month. While a few weeks of data provide scant insight into the broader future of asset class returns, we maintain hope that the landscape for rebalancing will improve compared to recent times. While we don’t wish for bear markets, we stand ready to capitalize on them when they inevitably surface within certain asset classes. That sentiment, as they say, drives the process of strategic rebalancing.
Regardless of what is on the horizon, 2007 has already displayed a departure from recent years, where virtually all asset classes have enjoyed gains. Indeed, 2006 mirrored 2005, 2004, and 2003 in that regard. While we appreciate bull markets as much as anyone, as students of market history, we recognize that such favorable periods cannot persist indefinitely; eventually, one of the key players is bound to falter.
The latest inflation figures have been released, offering mixed signals in the December report on consumer prices.
As always, the primary focus will be the consumer price index (CPI), which showed a notable increase last month compared to November. Consumer prices rose by 0.5% in December after remaining stable in November, as reported by the Labor Department. This uptick can largely be attributed to energy prices.
However, energy prices are beginning to decline this month, indicating that the December CPI may soon be outdated, with January’s update likely reflecting a more favorable outlook in the ongoing battle against inflation. Crude oil futures continue their downward trend in 2007, now trading at levels not seen since mid-2005.
Asset allocation is often regarded as a crucial factor determining the success or failure of diversified portfolios over time. Missteps in asset allocation cannot be rescued through market timing or security selection. We lean towards this view, though the practicality of implementing sound advice becomes subjective when tailoring specific portfolios. One person’s ideal asset allocation may represent a nightmare for another. This disparity is somewhat inevitable, as each asset allocation should be crafted to fit an individual’s goals, risk tolerance, and time horizon.
Consequently, establishing standardized benchmarks for asset allocation is challenging. However, if a default does exist, it might be the market’s interpretation of optimal allocation based on market capitalization. Although market cap faces criticism from newer benchmark methodologies, like fundamental indexing, it remains a widely accepted and objective measure within capital markets. While one might debate the appropriateness of investing in equities through market-cap allocations, this benchmark proves valuable for gauging financial market trends.
With this perspective in mind, we analyzed data on global equity markets, particularly using information from S&P/Citigroup Global Equity Indices. Despite the extensive range of indices available, we concentrated on seven to provide a comprehensive overview of the evolving landscape of market-cap equity allocations worldwide.
On Thursday, the government is set to release its December inflation report. However, it’s anticipated to be a non-event, as the market largely believes that consumer prices no longer pose a threat.
A reflection of the market’s confidence in contained prices can be seen in inflation-indexed Treasuries, known as TIPS. Last Friday, the yield spread between standard 10-year Treasuries and 10-year TIPS was only 2.28%, one of the lowest levels in recent years. This suggests a growing market assurance regarding future inflation, which has diminished notably in recent weeks.
Today, the markets are closed in the United States in observance of Dr. Martin Luther King Jr. Day; however, the government’s printing presses remain busy. The Federal Reserve is currently issuing dollars at an annual rate not observed in nearly two years.
According to data from the Fed, the M2 money supply has surged by 5.6% over the past 52 weeks as of January 1, 2007. This represents the fastest increase in 52 weeks since February 7, 2005. When looked at on a 10-week basis, M2’s growth rate isn’t as impressive compared to historical records but has clearly been on the rise, nearing the previous 10-week peak of 2.4% reached in May 2003.
Once again, data is suggesting that the economy may be stronger than previously believed. Or perhaps it’s more accurate to say that it isn’t as weak as many had anticipated.
Regardless of how you phrase it, the economic indicators coming in continue to provide reasons to reconsider the projection that 2007 will bring widespread economic hardship. Nonetheless, it’s important to remain cautious; we don’t foresee a dramatic surge in GDP. A slight downturn in economic momentum is still occurring, but it now appears to be milder than many had forecast.
Recent evidence supporting this tempered optimism comes from this morning’s retail sales report for December. The U.S. Census Bureau revealed that retail and food service sales increased by 0.9% last month compared to November.
This is remarkable for several reasons. Initially, a 0.9% increase for December surpasses December 2005’s 0.4% growth. Additionally, it marks the best monthly gain since July’s 1.4% increase. Furthermore, the year-on-year change in retail sales indicates that December’s 5.4% growth over the past December signals a positive shift in trajectory.
Today’s report on initial jobless claims undermines the notion that the Federal Reserve may soon lower interest rates.
The Labor Department stated this morning that first-time unemployment benefit claims dipped to 299,000 last week. This marks the lowest weekly filings since July 22.
In essence, evidence continues to accumulate indicating that the economy is performing better than previously anticipated. This adjustment in outlook will likely exert significant influence on the bond market, which is reevaluating what constitutes an appropriate yield for the benchmark 10-year Treasury. As of yesterday’s close, the yield on the 10-year was 4.68%, up from 4.43% on December 1.
Is there still potential value in global equity markets? The answer depends on your perspective of “value.”
A review of market fundamentals and performance from 2006 indeed paints an optimistic picture, based on data from S&P/Citigroup Global Equity Indices. As highlighted in our first table, owning stocks last year was generally profitable. European emerging markets led the way, achieving a total return of nearly 47%. On a global scale, stocks climbed by an impressive 21%.
As you may have observed, a bull market in stocks is underway. Our primary focus in this discussion is on U.S. stocks, particularly as represented by the S&P 500, which is the commonly referenced benchmark. Recent performance has been good, if not spectacular.
Up to this point, the S&P 500 has delivered a remarkable total return of 12% over the past year, comfortably exceeding the long-term average of around 10%. Over the past three years, the annualized total return remains decent at 9.7%, according to Morningstar.com.
The market’s ascent can be attributed to a significant rise in corporate profitability, which has, in turn, fueled earnings growth. Indeed, earnings growth has been nothing short of exceptional. Bob Doll, the chief investment officer for Blackrock, noted that S&P 500 earnings have recorded double-digit growth every year since 2002. Upon finalizing the numbers for 2006, Doll anticipates that S&P operating earnings will increase by 18%, and he shared these insights at a New York press conference I attended recently.
### Introduction
As global markets evolve, emerging markets have often been spotlighted for their investment potential. However, recent trends suggest that such opportunities may be shifting. This collection of articles explores various economic indicators, investment strategies, and market dynamics, offering insights and perspectives from numerous analyses.
### Conclusion
In navigating the complexities of the financial landscape, understanding both current performance and future projections is essential. The evolving dynamics within emerging markets, coupled with changes in consumer prices and employment trends, signal a period of reevaluation for investors. Staying informed and adaptable is crucial in this ever-changing environment.