Published May 10, 2024
Just before the Great Financial Crisis (GFC), Emerging Markets went on one last tear ripping higher by +12% in October 2007. That move capped a near 5x rally of the group over a 5-year period as China embarked on a massive build out. The Emerging Markets ETF (symbol: EEM) closed that October 2007 at a price of $39.32 per share. That same ETF opened 2024 at $39.83 – virtually no gain whatsoever in sixteen YEARS!
In 2020 as markets raced higher despite Covid restrictions and dislocations, Emerging Markets looked like they had finally found a new rally. But, as has been the case repeatedly over the past decade and a half, it was all quickly undone.
Emerging Markets have historically been highly correlated with commodities and with the fortunes of Chinese stocks. China is now trading near its post-GFC lows with pessimism about the Chinese economy running rampant. This chart shows how the extreme level of investor bets on the market falling (aka China shorts in red) has often preceded a big move upward.
If the high level of short positions in Chinese stocks often presages a rally, we can expect that emerging markets will also benefit, perhaps breaking free of the choppy, sideways trading of the past sixteen years. The chart below shows the history – the outperformance in the first decade of the 2000s and the subsequent underperformance ever since.
Over the past three months, Chinese stocks have found strong buying interest. We will see if this time is THE time for Chinese stocks and emerging markets to get really rolling.
Following on last week’s notes about the transformative power of AI investment, we offer another couple of inputs. First, is the astounding growth of Amazon’s datacenter business (Amazon Web Services or AWS). The company has long been a leader in datacenters with the business now having grown to a $100B per year behemoth.
The surge in datacenters is fueling a rally in utilities who must provide the electricity as well as air conditioning equipment (see the stock prices of Carrier and Trane) and another industrial company, Eaton, shown below. Eaton presents the sharp change in their projected fortunes just from last fall; the result of surging AI-driven opportunities.
While the stock market has spent a year trying to understand what is real, currently here, and still just a dream when it comes to AI, there’s no question of the spending power the AI opportunity is presenting.
Market Update
Stocks kept their rally going Monday as investors continued the positive reaction from the prior Friday’s jobs report. That report showed employment weakening a bit, a welcome trend that increases the odds of a Fed rate cut later this year. Stocks rose +1% Monday. They traded flat Tuesday with earnings report season coming to an end and investors looking for the next catalyst. Stocks have generally responded well to another quarter of solid earnings reports. Earnings have grown over +5% this quarter; their largest gain in two years. Wednesday saw another flat day on little new information. Thursday gave investors a broad based rally, albeit the end result was a modest uptick of +0.5%. Nonetheless, it was the seventh straight day of gains for the Dow Jones Industrial Average (DJIA). The index is often derided as being behind the times with its slow adoption of leading-edge companies. But the result is an index that does show the strength of older-line industrial and manufacturing companies. Those companies are surging on a number of fronts as global economic growth ticks upward and money flows into infrastructure projects (see our comments on AI-driven spending in our recent blogs). Friday brought a mixed result with another gain for the Dow while the Russell small-cap index suffered almost a -1% loss.
Stocks have already recovered almost the entirety of their April downdraft. This week, the S&P 500 (SPY) gained +1.87% while the Nasdaq 100 (QQQ) added +1.51%. Small-cap stocks (IWM) ticked higher by +1.19%. Of note, the index of international stocks (EAFE) eked out a new high this week.
Warm wishes and until next week.