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Emerging Market Weakness to Infect US Markets?

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Emerging Market Correction Blog Series

Oil, Jobs, and Earnings

Stock market investors have been roiled in 2015 by increased volatility. We at Ideal Asset Management see this as a result of a slowdown in emerging markets which was exacerbated by China’s decision to devalue its currency in August. Emerging market weakness can be seen in many EM countries, such as: Brazil, Russia, China, Singapore, Indonesia and Africa. This is seen in five market factors that we will look at over the course of two blog posts. The first post will focus on the price of oil, the jobs growth, and a slow earnings season. Our next blog post will review the impacts of potential for rising rates and currency weakness.

Price of Oil
The steep drop in the price of oil has been destabilizing for oil producing nations who borrowed heavily with the anticipation of high oil prices. In this new era of depressed oil prices, countries like Brazil, Russia, Mexico, etc. are likely to suffer continued economic weakness. If oil prices do not recover, some countries may default on their debts, which could have a ripple effect on developed nations.

Jobs Growth
Even more troubling for stock investors is the recent deceleration of jobs growth in the United States. The US unemployment rate currently stands at 5.1%, down from a high of 10% in October of 2009. As the US economy reaches full employment, the risk of further deceleration of jobs gains is high. We at Ideal Asset Management believe this may lead to reduced growth for US corporations.

Slow Earnings Season
If more evidence of an earnings slowdown materializes, PE multiple contraction combined with reduced earnings may lead to a bear market. The fact that the US market has risen dramatically since the Great Recession may exacerbate the decline as long bets unwind and hedge funds short the market. The US stock market is at risk of a significant earnings slowdown in our view.

Ideal Asset Management’s Take:

In light of the potential macroeconomic risks on the horizon, Ideal Asset Management believes that prudent investors should consider reducing exposure to equities.

 

Disclosure:

All of the ideas expressed in this article are the opinion of Ideal Asset Management LLC

Before trading on any of the information in this article, consider consulting your financial advisor to make sure it suits your financial goals

All investments carry the risk of loss

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