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David Callaway
Feb. 3, 2011, 6:48 a.m. EST
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By David Callaway, MarketWatch
SAN FRANCISCO (MarketWatch) "” Cyclones and floods in Australia. Monster snow and ice storms in the U.S. and Britain. Revolution in the Middle East. Who would have guessed just six weeks ago, when the only investor worries were how many iPads Apple would sell for Christmas?
When former British Prime Minister Harold Macmillan was asked what the greatest challenge was for a statesman, he was said to have replied, "Events, my dear boy, events."
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Hosni Mubarak would agree, as would investors in emerging and developed markets alike. Everybody is worried about inflation, the euro debt crisis, and the U.S. municipal bond market. That's why those issues won't create the next crisis. It's what we don't know that's a concern.
But in the past several weeks, global equity markets have largely ignored events that only a year ago might have gutted portfolios. Despite the economic impact of three major snowstorms in the Midwest and East Coast since Christmas, U.S. stocks had one of their best Januarys in 14 years. Australian stocks closed higher last month, and are up more than 10% since the summer, despite the flooding that devastated Brisbane and many other cities, and Thursday's cyclone.
Perhaps most surprising, emerging markets have largely shrugged off events, including a spike in oil prices and the protests in Egypt, Tunisia, Yemen, Jordan and elsewhere. The iShares MSCI Emerging Markets Index ETF /quotes/comstock/13*!eem/quotes/nls/eem (EEM 46.43, -0.14, -0.30%) /quotes/comstock/13*!eem/quotes/nls/eem (EEM 46.43, -0.14, -0.30%) /quotes/comstock/13*!eem/quotes/nls/eem (EEM 46.43, -0.14, -0.30%) is down only slightly since the beginning of the year, and remains up about 15% since the summer's euro woes.
So if revolution in the world's most volatile region and a series of blows from Mother Nature can't shake the apparently relentless optimism that has gripped the markets in the past few months, what can?
Well, we don't know. That's the rub. It's clear though that investors have discarded the pessimistic outlook on the world's economy "” and on equities in general "” that's dominated since Lehman collapsed and gripped a global recovery theme, led by the U.S., that has revived investor enthusiasm for stocks. Even the popular Super Bowl Indicator forecasts this year a bull market no matter whether the Green Bay Packers or Pittsburgh Steelers win. Talk about a stacked deck.
The lesson of Egypt has been that these markets have been so good for so long that many investors might have forgotten the political risk that often accompanies investing in lesser developed markets.
Time to worry? Perhaps. It's been a good run, in tandem with a solid U.S. corporate earnings season. So a springtime scare is inevitable. But when markets make a structural turn like this the trend usually lasts more than a few months. Some analysts have said we've entered a new bullish cycle, which will be characterized by a return to equities by investors, gains above $100 a barrel for oil, higher interest rates, and likely, an end for the time being to the stunning run in gold.
Indeed, as Mark Hulbert points out in his latest investor newsletter, Hulbert on Markets: What's Working Now, the failure of gold to rise during last week's Egyptian turmoil has led to some to believe a period of relative weakness for the popular metal is in the works. Hulbert sees this as a contrarian indicator, however.
The wild cards here are China and India. Despite the roaring China growth story, which in part explains the durability of the Australian market, Shanghai has had a poor six months. India has had three poor months, including a disastrous start to the New Year, in part because of government scandals.
The great thing about emerging markets is that in any given year, some can do well even if others do poorly. And there's no mistaking the bull market they've been in for many years. In fact, the lesson of Egypt has been that these markets have been so good for so long that many investors might have forgotten the political risk that often accompanies investing in lesser developed markets.
Should another event catch hold and shake investor confidence, however, look to emerging markets to be the early warning sign for a larger turn in the more developed markets shortly afterward. In the meantime, since it doesn't matter to the markets either way, I'll take the Packers.
David Callaway is editor-in-chief of MarketWatch.
David Callaway is editor-in-chief of MarketWatch, responsible for the global news coverage of 100 journalists in 12 bureaus in the U.S., Europe and Asia. A financial journalist for more than 20 years, Callaway has worked for Bloomberg News, the Boston Herald, and assorted television and cable stations as a reporter, columnist and commentator.
Once joined at the hip in previous relationships "” AT&T with Apple and Motorola with Verizon "” together they hope to counter the iPhone at Verizon
2 min ago2:35 p.m. Feb. 3, 2011
"Complacent bulls ignore January turmoil: A volatile January of storms and global turmoil has underscored a ... http://on.mktw.net/fumZfv" 7:45 a.m. EST, Feb. 3, 2011 from dcallaway
"Losing the war on intolerance online: A week after Obama's call for greater national civility, the war agai... http://on.mktw.net/fF1OPi" 12:39 a.m. EST, Jan. 20, 2011 from dcallaway
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