Casey Snyder and Tom Sedoric 

Three years ago, I wrote about the S&P 500 based on valuations from a historical perspective and subsequent returns. The results were clear: low starting valuations were followed by high returns, and high starting valuations were followed by low returns – the perfect representation of ‘buy low, sell high’. It’s been hard for me to get excited about the U.S. stock market for the past five years because while it’s performed well, it’s also pushed valuations higher within a range that has historically been associated with much lower returns to follow, while other markets - particularly foreign and emerging stock markets - have lagged.

The third quarter of 2015 was ugly for nearly all markets, and the trend has continued. Emerging markets continue to attract the bulk of media attention as investors fret about slowing growth in China; meanwhile, U.S. and developed foreign stock markets (i.e. Europe) have also suffered the wrath of slowing global growth. The interest rate environment continues to distort markets – instead of raising rates, central bankers have continued with their bag of tricks. There have been 40 central bank rate cuts this year. 40! This is astonishing and harmful for responsible investors. Low interest rates mean lower overall returns – its math, not opinion. With lower returns expected combined with heighted global volatility, it’s prudent for savers to be more respectful about the price they pay for an underlying investment. 

Right now, emerging markets are within a historically inexpensive valuation range.¹ Might they stay inexpensive or become even more inexpensive by means of further declines? Absolutely. But for many savers, lower prices present an opportunity, especially when so many asset classes are richly priced.

To put this inexpensive valuation range in perspective, the last time Emerging markets were this cheap and out-of-favor was around the year 2000. They had severely underperformed the S&P 500 from 1995 to 2000. However, this unpopular asset class went on to generate real returns of over 13% between 2000 and 2010.² Meanwhile, the most beloved asset class of 2000, the S&P 500, generated a negative real return during that same period.³ That’s right; it suffered a lost decade between 2000 and 2010. 

By no means am I saying the emerging markets will repeat their performance of 2000 to 2010, but I am suggesting they are on sale according to history. Rather than cutting this asset class that currently represents a very small part of most allocations, we should be strategizing how we might be able to take advantage of these cheaper entry points.

For everyone who is actively engaged in a savings plan (i.e. 401k, Roth IRA, or after-tax savings plan), we should be appreciative of these lower prices – after all, if you’re going to be saving (you are!) wouldn’t you rather buy something on sale than pay a huge premium?! 

Naturally, this should evoke questions for everyone reading: How much emerging market exposure do we already have? Within which type of account should we look to increase exposure? Should we use an index fund or actively managed position? How does this fit in with my overall plan? 

For the first time in a long time, I’m getting excited about buying an asset class. Not because I have a crystal ball or there are any assurances, but because we are finally being presented with an opportunity to buy low - a concept that’s been absent for some time.

 

¹http://www.researchaffiliates.com/AssetAllocation/Pages/Equities.aspx ²GMO Commentary, Wells Fargo Absolute Return Fund ³http://www.moneychimp.com/features/market_cagr.htm Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility. These risks are heightened in emerging markets. The material has been prepared or is distributed for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Raymond James Financial Services does not provide tax or legal advice. The opinions expressed here reflect Tom Sedoric – Partner, Executive Managing Director and Wealth Manager and D. Casey Snyder, CFP® - Partner, Senior Vice President and Wealth Manager, judgment as of the date of the report and are subject to change without notice. Statistical information has been obtained from sources believed to be reliable, but its accuracy and completeness are not guaranteed. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Keep in mind that individuals cannot invest directly in any index.