There are bears out there right now. Not the furry kind you watch out for on hiking trails. I mean the bears in the market.
We’ve recently seen a significant divergence between the US stock market’s performance and the performance of almost every other international market. While our market remains relatively strong, stress signals are flashing in markets across the globe. Which leads investors to wonder the same thing hikers consider before they head out for a remote trek:
Should we be worried? I would say that, like a prudent hiker, we need to be mindful of possible dangers, but not scared.
It is true that international stocks in both developed markets and emerging markets have struggled in 2018. Markets all over the world have fallen, and not just a little bit. Many have experienced a 20% or more correction, leaving them in full bear market territory. The Vanguard Emerging Market Index is down 20%, MSCI All Country World Index is down 13%, and Euro Stock 50 is down 15%. Looking to certain MSCI ETFs, we see that the MSCI Hong Kong ETF has dipped 12.4%, the MSCI China ETF has tumbled 24%, and the MSCI Brazil ETF has fallen 34%.
Meanwhile, in the US, the S&P 500 is net positive about 1% since January 26. We’ve had some tumbles, but we’ve also had subsequent recoveries.
Compiled on Yahoo Finance
As the chart above shows, markets around the world took a hit in February of this year, but then recovered into the spring. Markets stayed pretty consistent until May when the tariff dispute began in earnest. It was at this point that we started to see a divergence between US markets and most other international markets.
Some investors are concerned that international bears will bring the US down. But so far, US stocks have remained resilient during the tariff skirmish. The bottom line is that international markets currently face challenges that aren’t problems here in the US.
Tariffs are clearly more punitive to US trading partners versus to the US. Broadly speaking, this is because our trading partners are more reliant on us buying things from them than we are from them buying from us. This point is evident when we consider that the S&P 500 is up, and China’s market is quickly heading into a bear country. It is no coincidence that this divergence started at the onset of President Trump’s tariff fight.
The US Federal Reserve has been increasing interest rates for some time now. These upticks have helped increase the US dollar and, time-wise, tied in closely to the tariff watch. Plus, tax reform is bringing $700 billion back into the US via repatriated corporate profits. All of these forces have worked together to increase the value of the US dollar (USD).
Debt, debt and more debt. There is a ton of international debt out there, and it’s US dollar-denominated. Through the year 2025, emerging market governments and companies face $2.7 trillion in USD-denominated bonds and loans that will come due and have to either be paid off or refinanced. This does not include euro and yen-denominated debt, which these countries also have. And as the USD rises and these other currencies go in a different direction, that debt actually balloons.
So, will the US economy and market remain resilient? Can we navigate the Land of Foreign Bears unscathed?
While the global economy is more interconnected than ever, there are still stark differences between the US and other countries. International weakness won’t necessarily bring down America.
Take, for example, the year 1994 when the US economy was similar to today’s – flattening curve and steady growth. There was a -35% bear market in emerging markets from the third quarter of ’94 through the first quarter of ’95. Mexico was defaulting on debt, and the peso fell by more than 50% over just a few weeks. Europe was also down about 20% in 1994. Still, the S&P 500 was essentially flat.
The Asian crisis in ’97 and ’98 is another example. In 1998, it is true that the S&P 500 was down 20% at one point during the summer, but it didn’t last long. We finished the year up almost 30%. And from 2010 to 2015, E.M. (emerging markets) was also extremely volatile without much impact on US stocks.
In the US, we have to continue to watch domestic credit conditions for evidence of any sort of contagion risk spreading. But, so far, there are no warning growls or flashing of teeth. The bears remain abroad, and will hopefully stay there.
