Morning Dow Report: Why Investors Are Late Worrying About Emerging Markets

Emerging markets have dramatically underperformed U.S. stocks for a long time, so why are investors particularly nervous about them now?

Jan 30, 2014 at 11:00AM

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

So far this morning, the Dow Jones Industrials (DJINDICES:^DJI) are gaining ground from their recent declines, with the average up 88 points as of 11 a.m. EST. Yet even today's gains haven't put an appreciable dent in the decline the Dow has suffered in January, and emerging markets have performed even worse, with the iShares MSCI Emerging Markets ETF (NYSEMKT:EEM) and Vanguard FTSE Emerging Markets ETF (NYSEMKT:VWO) both down between 8% and 9% for the month -- including gains from this morning. As justifiable as investors' fears seem to be about emerging markets, the real question is why they're getting so much attention now -- after more than a year of terrible performance.

Lost in the noise
The stock market had an extraordinary year in 2013, with the Dow soaring 26.5% and broader U.S. market benchmarks posting even more impressive performances. As a result, it was easy for investors to ignore lagging areas of the market, as long as they didn't produce dramatic losses. That's what happened last year with emerging markets, as the iShares and Vanguard ETFs lost between 3% and 5% -- a swing of about 30 percentage points.

The fact that the disparity in returns between the U.S. and emerging markets has lasted for so long leads us back to the question of why this has been a worry for investors at this point. In all likelihood, it's because unlike last year, the Dow hasn't produced a positive return in 2014, and so investors are looking more closely at the causes and pinning the blame on areas producing the most negative financial news.

Some Dow components have felt the pressure from weak emerging markets for a long time. Caterpillar's (NYSE:CAT) poor performance over the past two years has stemmed from the near-disappearance of demand from China for construction and mining equipment, in the face of dramatic price declines for commodities and a drop-off in construction and infrastructure activity. McDonald's (NYSE:MCD) has also been flat since early 2012, with its exposure to emerging markets such as China failing to produce the growth that investors had counted on to offset sluggishness in the U.S. and other more mature sectors.

The conclusion investors should draw is that the drop in emerging markets in 2013 was relatively quiet, but further losses in 2014 won't fly under the radar unless the Dow ignores their negative pressure on global markets and posts positive returns. What happens to emerging-market economies this year could justify investors' concern, but value-conscious investors should remain ready to pounce on opportunities that could arise if the news from the emerging-market world turns out not to be as negative as many fear.

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Dan Caplinger has no position in any stocks mentioned. You can follow him on Twitter @DanCaplinger. The Motley Fool recommends McDonald's. The Motley Fool owns shares of McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

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KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

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That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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