Understanding the Decline in Emerging Markets and Materials

During the recent selloff, emerging markets and materials felt a lot more pain than the broad market. This makes some sense on two levels.

One is that both areas have outperformed the broad market for ages, and the other is that in averting risk, people sell things that are thought to be risky.

As time goes on and declines of varying magnitude come and go, you may be inclined to trade around these declines. If you do there will be some declines that you trade well, some that you trade poorly and some that you miss altogether.

The chart below shows that coming off the bottom from last week that emerging markets, as measured by iShares MSCI Emerging Market (EEM), and materials, as measured by WisdomTree International Basic Materials (DBN), have come back significantly faster than the S&P 500.

Neither of these funds are all the way back, not even close, but the extra decline felt before is now being made up with extra snapback. If the market indeed takes back essentially all of what it gave up earlier this month it makes sense to think that these other areas will take back most of their respective declines as well.

To be clear, this post is not about predicting what comes next. The point is to create some context around fast declines and what happens if you miss them or maybe to point out that some folks will be better off not trading them. A recurring point on this site has been that fast declines are usually followed by fast snapbacks which is what we have had so far. That is not to say that a slow decline may not be next because some sort of decline could be the next thing but panicking into fast declines is the wrong trade because there is some snapback.

Anyone who struggled emotionally earlier in the month with their portfolio might want to think about some changes now, before, or in case the market panics again. I have no trade to make in that context, but some folks might.