In my humble opinion, the Fed’s latest bail out for Wall Street does have its advantages; namely, this easy-money move should stimulate even more investment cash flows into red-hot emerging markets. As if global investors needed another excuse to invest there.
Emerging markets already take top honors as this year’s best performers. In fact, the MSCI Emerging Market Index has trounced the S&P 500 in terms of performance by a margin of better than 3 to 1 so far this year.
While the S&P 500 has rebounded from its credit-crunch induced summer slump, it’s only posting returns of about 10% so far this year (see graph); meanwhile the Emerging Market Index has already gained over 35% -- and counting.
In fact, a big part of the performance advantage for EMs have come since the August low, when expectations of a Fed rate cut began to gain currency, but it’s not only about interest rates.
There are a number of good reasons to favor emerging markets over the S&P 500 in this environment. Fundamentals, like sales and earnings growth is a very big reason.
After a record setting run of 14 consecutive quarters of double-digit profit growth for the S&P 500 from 2003-2006; investors are now bracing for disappointing earnings reports in the third quarter.
In fact, the S&P 500 is expected to post year over year earnings growth of less than 1% for the 3 months ended September – down sharply from a forecast of 6% profit growth as recently as July 1st, according to data from Thomson Financial. Ongoing uncertainty about the sick housing sector and its impact on the U.S. economy is to blame here.
If this forecast proves correct, it would be the weakest quarterly profit result for the blue-chip index in more than five years. Certain sectors should still produce good results however, particularly the defensive sectors of the S&P 500, and those that earn much of their profits from booming international sales. Healthcare and technology for instance, should continue to post double-digit earnings gains. But watch out for financial and consumer stocks, where profits are expected to decline 6% and 7% respectively.
P.S. I'll be making a guest appearance on CNBCs “Closing Bell” today at 3:45 PM EDT to discuss the impact of 3rd quarter earnings season . Be sure to tune in to hear more about my favorite stocks and sectors to own right now!
To watch the video on CNBC's website, click here.
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