February 8, 2018— Since January 30, we have seen sharp movements in both domestic and international equity markets. The most significant drop thus far came on Monday, Feb. 5, when the S&P 500 declined by 4.1%, and international markets fell as well.   Global markets remained volatile on February 6 and 7. A notable feature of the early February 2018 equities pullback is the low dispersion of negative equity returns across global markets.

Of course, the unexpectedly large February 2nd U.S. employment report boosted both U.S. interest rates and the U.S. dollar, triggering a synchronized global equities pullback that circled the globe repeatedly over Monday through Wednesday.  

U.S. equities returned -4.94% during February 1 -7.  In comparable U.S. dollar terms (reflecting both local currency equity returns and local currency depreciation against the U.S. dollar), Spanish equities returned -5.78%, German -5.70%, UK -5.60%, Japanese -4.70%, and Italian -3.34%. Obviously, this is a surprisingly narrow range of outcomes.

 Developed markets February month-to-date performance


Data as of February 7, 2018

Source: Bloomberg

A particular surprise is the relatively favorable Italian equity return, which comes about a month before March 4 general elections. Based on current opinion polling, there is considerable uncertainty over the nature of a future multi-party coalition government. 

There was somewhat greater dispersion among emerging markets, with Chinese and Korean equities somewhat more adversely impacted. However, we’ve seen nothing like the 2013 Taper Tantrum, which led to very sharp drops in emerging market equities.   

China and Korea returned -8.93% and -8.69%, respectively. China’s currency and interest rates are levered to the U.S. dollar and interest rates.  Korea’s equities were impacted directly and indirectly by the pullback in U.S. tech stocks. India, South Africa, Taiwan, Brazil, and Russia returned -6.08%, -5.24%, -5.23%, -5.22%, and -3.02%, respectively.  

Emerging markets February month-to-date performance


Data as of February 7, 2018

Source: Bloomberg

Summarizing, the low global dispersion of negative equity returns in the early February pullback may suggest that there is no single market or set of markets that would offer particularly good downside protection should another U.S. equities pullback occur in 2018 or 2019.  

Core narrative 

Given our positive view on U.S. and global economic fundamentals, we believe the market’s sudden downshift in market expectations over the past week is overdone and will be reversed. We expect a continuation of synchronized global economic growth into 2018, with historically lower European growth continuing to accelerate. We expect accelerating earnings among European stocks such as financials, which are levered to domestic growth. In short, we expect somewhat greater earnings growth in markets that already produce good relative returns through higher dividend yields. Equity pullbacks are always a test of resilience, and it’s comforting that European and Japanese stocks were resilient during the pullback.  



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