When one thinks of Emerging Markets as an investment sector, one typically thinks of countries with the promise of the kind of economic growth that is produced by rising populations with an improving base of commerce, technology and upward mobility.

While not truly restricted to only four countries, Emerging Markets do have their own nickname: the acronym BRIC, which stands for Brazil, Russia, India and China. You could think of them as the four horsemen of Emerging Markets.

The degree to which this sector is an attractive investment opportunity rests not so much on whether or not they will ultimately deliver on expectations as it is a question of the time horizon for it to occur. On that question, the Covid-19 Monster has shuffled the deck. As a result, anyone looking longingly at those Emerging Markets may well find some ‘emerging’ a lot closer to home – in the shape of domestic mid and small cap equities. That opportunity will depend on a return to normalcy.

The Coronavirus / Covid-19 pandemic has wreaked havoc all around the world evidenced by tragic death totals and financial destruction. Many argue that the loss of lives was unnecessarily high and that may be true. Many will also argue that putting the US economy in an induced coma may not have been fully necessary either.

Our challenges now are to minimize the damage to our health (both physical and fiscal). On that front, we have optimism. We believe that a return to normal is possible…so long as we don’t get used to something else.

A new report from the National Academies of Science, Engineering and Medicine has some sound advice for good folks who run American schools:

“Given the importance of in-person interaction for learning and development, districts should prioritize reopening with an emphasis on providing full-time, in-person instruction in grades K-5 and for students with special needs who would be best served by in-person instruction…

“Evidence to date suggests that children and youth (aged 18 and younger) are at low risk of serious, long-term consequences or death as a result of contracting COVID-19.”

“Keeping schools closed to in-person learning in Fall 2020 poses potential educational risks for all students. Children and youth benefit from learning experiences that include support from a teacher and interactions with peers. Even when it includes virtual interactions, distance learning cannot take the place of in-person interaction… The risks of not having face-to-face learning are especially high for young children, who may suffer long-term consequences academically if they fall behind in the early grades.”

Additionally, although some states have felt the need to once again tighten restrictions, we are hearing from officials that we are not at all likely to be facing another lockdown. What we see right now is a mixed bag of data.

Jobs added / lost continues to trend positive although the rate of recovery could certainly be better. A much brighter picture is retail sales where this week’s report printed a + 7.5% — much better than expected. Also, better than expected was industrial production (output of factories, mines and utilities). That came in at 5.4% compared to the 4% forecast.

So, getting back to our opening paragraphs, we will pass along this from the Wall Street Journal:

“In a note to investing clients, Cornerstone Macro’s Nancy Lazar and Arif Haque hail the recent rebound in U.S. manufacturing and say that a long-term “renaissance” in U.S. capital goods production will continue as firms “onshore” manufacturing to America and shift investment out of China. “Middle America Is Our Favorite Emerging Market,” says the Cornerstone crew.”

We think they may be on to something.

Ron’s Market Minute – Clawing and Scratching Our Way Back 

It’s pretty hard to tell from the news media what the status on our markets for this year looks like. If one listens – not too closely – one can only tell that the year has been one of ‘plunges’ and ‘soars’. I thought we’d include a chart of the major markets for the year, so far, and let you decide for yourself. 

Source: FastTrack Software

Let’s start with the red line which shows a representation of the S&P 500* Index- one that we’re all familiar with. You’ll note that from its starting value on January first, it fell along with all major markets in March, but has scratched its way back to barely positive for the year.  Although it is a good representation of the ‘market’, it is weighted by the size of the companies in the index, so the large companies have more weight than the less-large companies.  Then note the blue line which shows another S&P 500 Index, but this one is an equal-weighted index, meaning the smaller companies in the Index count as much as the larger ones.  Note that this gives a value for the average company of -10% for the year so far.  That seems about right as only 121 of the 500 companies in the S&P are positive for the year, 153 stocks are down at least 25%, and 33 stocks in the S&P are down at least 50% (data as of June 30, BTN Research). 

The outlier – the teal blue line is a representative of the tech-heavy Nasdaq index. You’ll note that (along with its major components such as Apple, Google, Netflix, Facebook and Amazon) it is in solidly higher ground for the year.  Also note that the smaller and mid-size indexes shown in grey and pink are clocking in about a minus 12 to minus 14% (on average). 

So, there we are. If an investor owns ‘average’ stocks she is down about minus 10% for the year, a small-cap investor is down (on average) about 14%, and the investor with the foresight to own only large-size US-based tech stocks is up solidly for the year.

And what does that say about the rest of this year? Not much. We are currently in a very volatile upswing period, and have a great deal of unknowns. We’ve experienced one of the greatest drawdowns in our country’s history, and one of the greatest upswings. Personally, we see the glass as more ‘half-full’ than ‘half-empty’ but the only thing certain is that there is a lot of uncertainly in today’s markets.

Ronald P. Denk, CFP®
Investment Advisor
Denk Strategic Wealth Partners
10000 N. 31st Avenue, Suite C-262
Phoenix, AZ 85051
Phone (602) 252-8700
Fax (602) 252-8701
Toll-Free (877) The-Denk

This weekly article reflects news, commentary, opinions, viewpoints, analyses and other information developed by Denk Strategic Wealth Partners and/or select but unaffiliated third parties. DSWP provides Market Information for illustrative and informational purposes only. If you wish to receive this weekly commentary by email please contact us at 602-252-8700 or by e-mail at lindaw@denkinvest.com. If you are receiving this commentary via email and would prefer not to please let us know either by email or phone.

Ronald Denk is an Advisory Representative offering services through Denk Strategic Wealth Partners, A Registered Investment Advisor. He is also a Registered Representative, offering investments through Lincoln Financial Securities Corporation, Member FINRA/SIPC.

Denk Strategic Wealth Partners is not affiliated with Lincoln Financial Securities Corporation. Information in this commentary is the sole opinion of Denk Strategic Wealth Partners. Past performance is no guarantee of future returns. All market related investments involve various types of risk, which include but are not restricted to, credit risk, interest rate risk, volatility, going concern risk, and market risk.

The Update provides information of a general nature regarding legislative or other developments. None of the information contained herein is intended as legal advice or opinions relative to specific matters, facts, situations or issues. Additional facts, information or future developments may affect the subjects addressed in this document. You should consult with an attorney, accountant or DSWP planner about your particular circumstances before acting on any of this information because it may not be applicable to your situation.

Lincoln Financial Securities and Denk Strategic Wealth Partners and their representatives do not offer tax advice. Please see your tax professional regarding your individual needs.

*The indices are representative of domestic markets and include the average performance of groups of widely held common stocks. Individuals cannot invest directly in any index and unlike investments, indices do not incur management fees, charges, or expenses, therefore specific index returns will be higher. Past performance is not indicative of future results.