Markets are continuing to react and adjust, mostly in a negative manner, to the Federal Reserve’s announcement about their intention to wind down their quantitative easing program later this year. Volatility, as it is known to do, popped back up in fairly short order after a steady decline through the first five months of the year. The S&P 500 Index is now off by more than -5% from its high on May 21, and interest rates on the 10-Year U.S. Treasury are high by almost 1% from their low on May 2nd. While corrections and pullbacks are always unsettling, the moves so far in the U.S. have been fairly run of the mill. After all, the S&P is still up more than 10% on the year, and bonds, at 2.58%, are still at extraordinarily low levels.
It’s been a different story, however, in emerging markets. Volatility has been much greater, and considerably more unnerving. For example, the iShares MSCI Emerging Markets ETF (EEM) is down by more than -17% on the year, having made its high for the year on January 2nd. It hasn’t been just stocks that have been hit, either. Emerging market bonds and currencies have also experienced widespread selling. EMB, one of the largest emerging market bond ETFs, is down by -14%, and an ETF that tracks emerging market currencies, CEW, is off by nearly -6% this year.
To be sure, there are other contributors to the recent volatility than just a change in expectations regarding Fed policy. News out of China indicates that their financial system may be experiencing a liquidity crunch, which could put additional stress on an economy that has been slowing. Regardless, to see these types of declines simultaneously across stocks, bonds, and currencies is troubling, because there have been previous instances of tremors in emerging markets spilling over to the rest of the world. Thankfully, we took steps to reduce our exposure to emerging market equities earlier this year. Looking forward, we are going to continue to keep a close on these markets as a potential harbinger that the current market correction has run its course… or if perhaps we could be in for an even rockier summer.
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