As Business Fundamentals Continue to Deteriorate, Markets will Eventually Follow
While it appears that emerging markets are rising, business fundamentals continue to deteriorate. This means that markets will eventually follow. For 2016, emerging markets are seeing the most trade action. In fact, ValueWalk reports that over the last few weeks, debt funds and emerging market equities have seen record movement.
As Business Fundamentals Continue to Deteriorate, Markets Will Eventually Follow
As business fundamentals deteriorate, companies are seeing their profit margins falter. According to Economy and Markets Daily, the United States stock market is extremely overvalued. Even if the U.S. dollar becomes stronger, it won’t help.
In the past, stocks behaved as they should. From 2003 to 2007, the stocks of companies that were performing well increased while the stocks of companies that were failing went down. It was a time of unprecedented low volatility, and the market truly made sense. Those days are long gone. Today, the markets are experiencing extreme unpredictability.
The Emerging Market Rally Outpaces the S&P 500
According to reports, the MSCI Emerging Markets Index is now trading at a forward earnings rate of 12.3 percent. This is just 3 percent off its reported five-year valuation high. The index is up by about 25 percent since its January low. These numbers show that the MSCI Emerging Markets Index outpaced the S&P 500 by approximately 8 percent over the same timeframe.
Analysts reminded investors that the only other time that the emerging markets have posted this kind of broad-based rally in modern-day history was following the crash of Long-Term Capital Management in September of 1998. At that time, the markets increased by 31 percent.
Investors are still interested in the markets of developing nations despite the economic and political volatility happening within a number of them. For instance, Turkey’s Borsa Istanbul 100 Index has seen its worst week since 2008 while Indonesia’s stocks dropped after its central bank failed to change interest rates.
During the last month, Goldman Sachs has drawn more than $18 billion into the assets of developing nations. In fact, over the last two weeks, the emerging market bond funds have seen record influxes.
Signs that the U.S. Economy is Worsening
While predicting market trends is never exact, industry experts use the past to establish educated guesses about where the market is going. In this case, they are seeing signs that the economy is starting to worsen. For instance, from the middle of March of 2008 to early May of the same year, the stock market experienced a vigorous rally. At the time, the investing situation convinced those in the industry that the turmoil was over and that the market was in good shape. Then, a major crash happened late in 2008.
The market is seeing a similar situation now. The Dow rose a few months ago, but almost every other number is indicating that the economy is failing. Dropping business sales are another sign of a worsening economy. For the last two years, business sales have been declining. Today, they are about 15 percent lower than they were in 2014.
Corporate earnings have also been sinking. In fact, they’ve dropped for the last four quarters. The only time that corporations see this happen is during a recession. In addition, commercial bankruptcies are up. According to GlobalResearch, bankruptcies in the commercial sector are up by 32 percent while Chapter 11 filings are higher by about 67 percent.
How is the Rest of The World Doing?
Compared to the rest of the world, the United States economy is doing well. Several areas in South America are dealing with a full-on economic depression while major banks across Europe are completely melting down. In Japan, the gross domestic product, or GDP, is in negative territory despite the country’s attempts to prevent the situation. China is also having problems. The country’s stocks are down by about 40 percent from their peak.
The world is currently experiencing an economic slowdown, and in time, the financial markets will follow. According to reports, global earnings are 14 percent off the high that they set during August of 2014. Currently, these earnings have returned to where they were five years ago. Alternatively, equity prices are about 25 percent higher.
Stocks are Performing Well for the Moment
For now, stocks are hanging in there, but as business fundamentals continue to decline, they will surely follow. Because of the current market situation, investors should consider ways to protect their portfolios. To read more about insider predictions, visit the Personal Money Store.