Trade wars? Nope. A slowdown in economic data? Nope. Geopolitical flare ups with Iran in the Gulf of Oman? Nope.
These days, the answer as to whether anything can make this market slowdown seems to “nope,” i.e., there seems to be nothing that can slowdown the surge in domestic stocks in 2019. Now, the one exception to this is if the Federal Reserve fails to play along, and we saw that in May.
The idea that the Federal Reserve Chair Jerome Powell might hold firm and keep the benchmark Federal funds rate at current levels spooked markets in May, and hence we saw the first real bout of selling for the year. Yet as soon as markets were spooked, the Fed made its revised intentions pretty clear by getting much more “dovish” in its June Federal Open Market Committee (FOMC) statement.
The removal of the word “patient” in the June FOMC statement with respect to interest rates and its replacement with the words “act as appropriate,” was the key position shift that let the bulls run in June — a run that was one of the best for the Dow Jones Industrial Average (a monthly gain of over 7%) in some eight decades.
Now, anticipation of what could be the beginning of a new rate cutting cycle by the Fed has reverberations around the world, and specifically for stocks in the emerging markets. Admittedly, those stocks have lagged the broader domestic market this year, and the two key reasons why have been trade uncertainty between the U.S. and China, and a strong U.S. dollar.
Yet with the trade situation now back in “truce” mode, and with the Fed now likely to begin rate cuts that should bring down the value of the dollar vs. rival foreign currencies, we could be looking at an extension of the June gains for emerging markets, and specifically for my preferred way to allocate to this segment — the iShares Core MSCI Emerging Markets ETF (NYSEARCA:IEMG).
Is IEMG Still One of the Best ETFs?
Year-to-date (through July 1), IEMG has given investors a very solid total return of 11.44%. And while that lags the S&P 500’s total return of some 19%, the upside here going forward for IEMG does have me smiling on the prospects.
If, as I and other market watchers suspect, the Fed does begin a rate cutting cycle at the July FOMC meeting, then the value of the greenback will come under pressure. That is good for emerging markets, as a weaker dollar enhances the appeal of these stocks.
Also, if the trade war can finally be put on the shelf, then emerging markets (which are heavily linked to Chinese economic growth) will be in a position to takeoff.
Is this a lot of “ifs” to hope for? Well, yes and no. These are two rather big “ifs,” but both are also very close to happening — indeed, a lot closer to happening now that we are in July than they were when we entered June.
I maintain that if you are looking for a sector-specific ETF to take advantage of what is likely to happen in the second half of the year, then IEMG and emerging markets in general is a sector to seriously consider.
At the time of this writing, Jim Woods was long IEMG in his Successful Investing portfolio.