• Bill Stone

Stone's Weekly Market Guide - Week of May 14

Because emerging markets will likely continue to be a focus for the markets with the recent currency woes of Argentina and Indonesia, the rate decision by the central bank of Indonesia will be watched more closely. In addition, MSCI releases its emerging markets index review which will include China A shares for the first time. China A shares are yuan-denominated shares traded on the mainland exchanges. The bond markets will have plenty of Fedspeak and ECBspeak to digest this week, including ECB President Draghi on Wednesday.

Our Chart of the Week deals with the notion that a strengthening U.S. dollar (USD) always weighs on emerging market assets including stocks. While it is an attractive theory, our chart shows that emerging market stocks in local currency terms are often positively correlated with the USD. Even in rising USD environment, emerging market stocks have sometimes moved higher as well. Certainly a rising USD decreases the unhedged return to a U.S. investor, but that is a function of currency translation not automatically an issue with the value of the underlying asset.

Notable last week in the U.S. markets was the strength of the momentum factor. Momentum is the propensity for a strong performing stock to continue to perform well. Every implementation I follow for U.S. momentum outperformed the S&P 500 last week. Momentum can be a very valuable piece of a portfolio over the long-term, but please do your homework. Also of note was that interest rate sensitive S&P 500 sectors (utilities & staples) were weak, but the normally interest rate sensitive REITs acted better. REITs still underperformed the S&P 500, but they posted gains for the week and have begun to improve in my work. Seems like an opportunity in REITs might be in the offing, but stay tuned.

To read the complete Stone's Weekly Market Guide please click here.

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