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.

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