The latest Chart of the Week is actually 4 charts! Today we’re looking at Emerging Markets and comparing them to the S&P500. When money managers are bullish and positioning themselves for higher stock prices, they tend to invest in more speculative, higher beta names. When PMs are positioning themselves for lower stock prices, EM gets killed, particularly relative to developed markets.
These 4 charts represent divergences between Emerging markets and the S&P500 over the past couple of decades. When the S&P500 is making lower lows but Emerging Markets are simultaneously making higher lows, it’s been evidence of risk appetite for stocks and markets have continued to rally for years after the divergence.
The question: Is this time different?
My argument is no, this time is not different. It’s actually part of our bullish case for stocks:
Click On Charts To Zoom In
From the 2004 low, the S&P500 rallied for over 3 years. From the 2009 low, the S&P500 rallied for over 2 years, before continuing for another 4. From the 2016 low, the S&P500 rallied for 2 more years.
We can argue back and forth all day about what constitutes a rally, where does it end, how do you define a correction, and the list continues. I think the bigger point here is that when Emerging Markets have diverged positively in the past vs the S&P500, it has been evidence of risk appetite from a longer-term perspective. These are NOT tiny rallies lasting a month or two. They last years.
Another counter-argument is that we only have a sample size of 3 here and I really hate tiny sample sizes. But again, I think the bigger point here is that it is evidence of risk appetite, not risk aversion. That’s what I’m trying to get at.
This is just one data point and we never want to make decisions off just one, or two or even 10. We want to weigh all of the evidence and approach the market accordingly.
By our work, this is evidence of risk appetite for stocks and is just one more thing to add to the bullish stance we’ve had all year.