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AAM Viewpoints – Bears Lurking Amongst the Bulls

The S&P 500 put in a series of four consecutive new highs as August wound down allowing the index to finally eclipse the 2,900 level and end a seven-month drought of new highs. This has extended the current bull market run to almost nine and a half years and boosted its total return to 425.06% (3/9/2009 – 8/29/2018, 19.12% annualized). As this has been transpiring we have seen the bears come out in force once again calling for, at a minimum, a pullback in U.S. stocks and in some cases the beginning of the next bear market. Perhaps it’s the unprecedented longevity of this bull market that is fueling the bears. Or it may be that we are in the month of September – which has historically been the worst single month to own stocks. Lest we forget October, home to many market panics and crashes. However, we feel it is another factor that is fueling the bears’ pessimism now, and it’s the bear market that emerging market stocks have just entered. The thesis seems to be – surely the U.S. equity markets can’t decouple for long from such a big component of the global economy without it too heading south. Yet it might surprise you to know that emerging market bear markets and decouplings are actually pretty common.

Looking at the MSCI Emerging Markets Index, we see it hit an all-time high on 1/26/2018 and a near-term low on 9/11/2018. Over that period the MSCI Emerging Markets Index lost 21.19% (in U.S. dollars) while the S&P 500 gained 0.52% for an outperformance by the S&P 500 of 21.71%. At first blush that might seem daunting, but as daunting as it is it isn’t unique over the course of this nine-and-a-half-year bull market. As the table below depicts you can see there have been at least eight MSCI Emerging Markets Index price return (PR) selloffs greater than 10% (average 21.18%) during this bull run and three bear markets (loss greater than 20%).

Source: AAM, Bloomberg data | Past performance is not indicative of future results.

In all cases the S&P 500 outperformed emerging markets with the average being 16.35%. In other words, the current emerging markets selloff and decoupling from U.S. markets is somewhat business as usual for this bull market. In addition, emerging markets are not alone as there has been many other rolling bear markets affecting other asset classes.

In 2011 we saw small-cap stocks, as measured by the S&P 600 Index, enter a bear market (-26.81%, 7/7/2011 – 10/3/2011). More recently REITs (real estate investment trusts), as measured by the MSCI U.S. REIT Index, also joined the fray (-21.31%, 8/1/2016 – 2/8/2018). These two are just a couple of examples and might be easy to justify as concerns over small-caps moving too far too fast were voiced as the bull market began, and recently concerns over rising interest rates has affected many higher yielding asset classes. However, the emerging market selloffs are a bit more complex.

First and foremost, it should be clear that emerging market stocks are usually much more volatile than developed market stocks, especially U.S. stocks. Second, emerging market stocks can be much more sensitive to moves in – and expected moves in – interest rates and currencies and both topics have garnered their share of headlines of late. Throw in the possibilities of a protracted trade war and it’s not hard to justify increased emerging market volatility, but we think this should be viewed as a long-term opportunity for investors.

Historically, emerging market equities have performed in line with the S&P 500. Specifically, if we look at the total returns from the inception of the MSCI Emerging Markets Index through the recent peak we see it has an annualized return of 10.88% compared to the S&P 500 at 10.92% (12/31/1987 – 1/26/2018). However, since 1/26/2018, as detailed above, they have underperformed by almost 22%. This we believe is primarily driven by trade war fears and though headline risk still exists and may escalate, we believe in the long term that trade tensions will ease, and emerging market equities will regain their footing. We believe the continued strength of the U.S. economy, as shown by a 14-year high print for ISM Manufacturing last week and an all-time high for Job Openings this week, will continue to help the global economy weather the near-term drag brought on by trade tensions.


CRN: 2018-0904-6870 R

This commentary is for informational purposes only. All investments are subject to risk and past performance is no guarantee of future results. Please see the Disclosures webpage for additional risk information at commentary-disclosures. For additional commentary or financial resources, please visit



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