Major Asset Trends: Divergence of U.S. Stocks and Emerging Market Stocks Continues
02/14/2011 0 comments
Last week saw the continued trend: U.S. stocks gained while emerging market stocks lost. Among risk assets, U.S. stocks (VTI) rose 1.69% while emerging market stocks (VWO) had the biggest drop: lost 2.41%. U.S. REITs (VNQ) was again strong, rounding out 2.58% gain. For more detailed performance, refer to here. The following table shows the trend scores for all major assets. U.S. REITs (VNQ, IYR), U.S. stocks (VTI, SPY) and commodities (DBC, GSG) retained their top three spots, clearly showing the continued up trend. Gold (GLD) recovered, notching up to sixth place.
| Assets Class | Symbols | 02/11 Trend Score | 02/04 Trend Score | Direction |
|---|---|---|---|---|
| US Equity REITs | VNQ | 15.18% | 10.81% | ^ |
| US Stocks | VTI | 14.32% | 12.28% | ^ |
| Commodities | DBC | 13.58% | 13.51% | ^ |
| International REITs | RWX | 9.27% | 9.54% | v |
| International Developed Stks | EFA | 9.16% | 8.6% | ^ |
| Gold | GLD | 6.85% | 6.73% | ^ |
| US High Yield Bonds | JNK | 5.93% | 5.55% | ^ |
| Emerging Market Stks | VWO | 5.41% | 7.75% | v |
| Frontier Market Stks | FRN | 2.47% | 2.8% | v |
| International Treasury Bonds | BWX | 0.67% | 1.77% | v |
| US Credit Bonds | CFT | 0.28% | -0.75% | ^ |
| Municipal Bonds | MUB | 0.24% | -3.11% | ^ |
| Treasury Bills | SHV | 0.03% | 0.0% | ^ |
| Emerging Mkt Bonds | PCY | -0.87% | -0.05% | v |
| Total US Bonds | BND | -0.98% | -1.35% | ^ |
| Intermediate Treasuries | IEF | -2.13% | -2.78% | ^ |
| Mortgage Back Bonds | MBB | -2.27% | -2.57% | ^ |
The trend score is defined as the average of 1,4,13,26 and 52 week total returns (including dividend reinvested). Investors should pay attention to the weakness of emerging market stocks and frontier stocks (VWO, EEM, FRN). We first noted this divergence (U.S. stocks strong while emerging market stocks losing ground) in an article on January 17, 2011. In general, frontier market and emerging market stocks are considered the riskiest among equities. Longer term, one can argue that the developed market economy has better and more sound fundamentals, with emerging market economy taking up 1/3 of global economy, the deterioration of their stocks will definitely affect the developed market equities, at least for a short period of time. Moreover, the current highly elevated U.S. and developed stock markets and their high valuation based on long term stock market valuation metrics such as Shiller's CAPE10 are pointing to at least some short term weakness ahead (though we don't know when). Symbols:EEM,VNQ,FRN,VWO,IYR,ICF,GLD,RWX,VTI,SPY,IWM,PCY,EMB,JNK,HYG,PHB,EFA,VEU,IEF,TLT,GSG,DBC,DBA,CFT,BWX,MBB,BND,MUB,SHV,AGG
In conclusion, the divergence of developed and emerging market stocks has gone on for a while. It might or might not be the first sign for the trend turning. Investors should continue to monitor such a divergence closely and take the evidence as it comes to position their portfolios. For a tactical asset allocation portfolio such as this, one will follow the development and adjust accordingly. For a strategic asset allocation portfolio, it is again a good time to review the overall portfolio risk level and adjust that to a level one is comfortable with.
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