Daily Gains Letter

Global Rout in Markets Gathering Momentum?

By for Daily Gains Letter |

Global Rout in Markets Gathering MomentumSo this is what it looks like when global investors take their eyes off the Federal Reserve’s quantitative easing policy and focus on the real economy instead! As I’ve been predicting, the global sell-off of stocks looks like it’s beginning in earnest.

And you can pinpoint the exact moment investors and economists around the world began to get jittery. It was on May 22, right after the Federal Reserve hinted it might start tapering off its $85.0-billion-per-month quantitative easing policy as early as Labor Day.

The global markets haven’t been the same since.

Japanese stocks have entered bear market territory, tanking more than six percent last Thursday to a nine-month low on the threat of reduced economic stimulus from central banks. South Korean shares slipped 1.4%, hitting their lowest close in seven months.

Concern that China’s economic growth is grinding down has seen the Shanghai Composite Index trading at its lowest levels since mid-December 2012 and has dropped 12% from the year’s high on February 6.

One of China’s biggest trading partners may also be feeling the pinch. Australia’s economy expanded just 2.5% in the first quarter, below projected forecasts of 2.7%. While the country’s economy had been chugging along due to increased demand for natural resources, it is beginning to sputter thanks to the slowdown in China. Couple this with the country’s underperforming non-mining sectors, and you can see why Goldman Sachs and others think Australia could, after 22 years, slip into recession. (Source: “Australia’s economic growth rate misses forecasts,” BBC web site, June 5, 2013.)

On top of that, the World Bank cut its global 2013 growth forecast to 2.2% from 2.4% and reduced China’s growth outlook to 7.7 % from 8.4%—the slowest pace since 1999. Regional growth in East Asia and the Pacific (excluding China) is expected to slow in 2013 to 5.7%, due partly to tightening fiscal policies. Economic contraction in the euro area is projected to be 0.6% in 2013, a significant discrepancy over the previous projection of 0.1%. (Source: “World Bank Expects Muted Global Growth, Led By Developing World,” The World Bank web site, June 12, 2013.)

At home, the Dow Jones Industrial Average and S&P 500, while down, remain somewhat resilient. This is surprising when you consider U.S.first-quarter gross domestic product (GDP) growth came in at 2.5%, far short of the predicted three-percent expansion rate. Or perhaps it’s not so surprising when you consider the Federal Reserve’s $85.0-billion monthly quantitative easing policy has been helping support Wall Street.

The transition from a five-year bull market artificially supported by the Federal Reserve to a self-sustaining global economy rooted in weak growth will not be easy—and clearly isn’t.

Investors looking for opportunities in a down global market might want to consider short international exchange-traded funds (ETFs). ProShares Short MSCI EAFE (NYSEArca/EFZ) provides investors with exposure to markets outside the U.S. This ETF provides investors with the inverse return of the underlying index (the MSCI EAFE Index in this case); if the index goes down one percent, this ETF goes up one percent.

Those interested in how economic instability in developed countries will affect emerging markets may want to look at ProShares UltraShort MSCI Emerging Mkts (NYSEArca/EEV). This ETF seeks daily returns equal to two times the inverse of the daily return of the MSCI Emerging Markets Index; if the MSCI Emerging Markets Index goes down two percent, this ETF will go up four percent.

It’s tough to consider investing when almost everyone else is running for the exit, but that’s the best time to keep your feet planted. And no matter where the domestic or global markets are heading, there are a variety of ETFs that can help investors weather any storm.

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