Officially Back?


For those of us travelling on the highways and local roads in recent days, it certainly appears that the school year is "officially back." It also appears, given the considerable traffic jams, that rising gasoline prices are not dampening demand. So much for price elasticity.

Somewhat similar to the school year officially being back, it appears that some of the previous 2013 laggards are attempting to make some form of a late year comeback. The question for investors is which of those comebacks can be sustained over the coming months and which will quickly fade, as I fear my New York Yankees’ late season comeback is about to experience.

Let’s first provide an update for what certainly appears to be a rather resilient equities market despite some near-term headwinds surrounding three critical, non-monetary policy decisions in Washington, D.C. – Syria, a new FOMC chairman, and the debt ceiling resolution.

Late in August, I wrote a blog suggesting it was time for investors to temper overall overweight exposure to equities back to market weight, with the exception of the energy sector. Given recent price action, it is logical to ask if it is once again time to assume more risk at overweight status, beyond just the energy sector. I suspect on a time basis we are getting close, however, I prefer further clarity on the above-mentioned three critical decisions from Washington, D.C. before we declare "all boats will rise."

While we wait for further clarity, it is intriguing to point out that some of the recent sector, index, country, and equity name outperformance has been by those that until the beginning of the third quarter had been underperforming year to date. In preparation for possibly increasing risk appetites once again, let’s review some of the previous laggards that are now leaders and sort through if they are "officially back."

Emerging Markets

Month to date, the MXEF (MSCI Emerging Markets Index) is up 4.76%, outperforming the RTY (Russell 2000®) +3.48%, NDX (NASDAQ 100) +3.13%, SPX (S&P 500®) +2.37%, DAX (German stock index) +2.14%, and INDU (Dow Jones Industrial) +1.71%. For the year, however, the MXEF is still a significant laggard at (-7.72%).

The MXEF’s month-to-date outperformance, whether from Brazil, China, Chile, India, or Mexico, includes both equity and currency market strength. However, I do not view these markets as “officially back” warranting immediate overweight exposure. Recent improvements in China’s economic data and clarity on the FOMC tapering are providing a near-term lift.

South Korea and Mexico, whose economies are largely tied to the United States, should be given first consideration for overweight exposure. While evidence for an immediate overweight allocation is not present, I am encouraged by the rhetoric from the G-20 that clearly understands the potential downside risks associated with the removal of the FOMC stimulus. Concurrent with that, I suspect the G-20 has adopted a plan to intervene and support emerging market economies which have been negatively impacted by the stimulus removal. Intervention to support select emerging market currencies provides a “put” under the market for emerging market investors.

2.    Precious Metals

Precious metal prices have been recovering for the entire third quarter. Silver has risen 21% and gold has risen 13%. There are three main reasons for the recovery: the rise in real interest rates has paused in recent weeks, U.S. dollar appreciation has stalled out (the dollar is down 1.5% for the quarter), and the geopolitical risk associated with Syria.

Are these previous laggards of 2013 “officially back?” Based on the evidence, I say no. Each of those three conditions should abate as we progress toward turning-leaf colors. However, the “short” trade on precious metals no longer carries a favorable risk/reward based on both technical and fundamental formations. More than likely, precious metals have already traced out their yearly trading range.

3.    Europe

In late August the lunch banter among the speculative hedge fund community was centered on investment opportunities in Europe. Yes, Europe is officially back. As I highlighted in my third quarter playbook, “Europe is investable once again.” Thinking back a few years please, have we held a G-20 meeting in which Europe was not topic number one? No, we haven’t, at least not until last week’s G-20. The absence of dialogue regarding Europe is a positive step that confirms this region’s fundamental improvement.

4.    Materials

Are materials officially back? I wouldn’t say yes. The third quarter’s leading sector, materials at +8.72%, is experiencing a mean reversion trade as global manufacturing recovers much faster than previously anticipated.  Much of the recent outperformance is attributed to the unwinding of cyclical short themes surrounding coal and steel. Those short biases should now be neutralized. 

Along with the material sector’s leadership, the industrial sector has performed very well, up 6.52% during the third quarter. I view exposure to the industrial sector as a more optimal play on the improvement of global manufacturing and the preferred mechanism to gain cyclical exposure.


The recent strength in the NASDAQ 100 (NDX) should not be ignored. In fact, yesterday the NDX traded to a new 2013 high of 3174.87. Largely correlated to that appreciation is the renewed positive momentum for NDX heavyweight Apple (AAPL). During the third quarter, AAPL has advanced 27.65%.

Previously a 2013 laggard, AAPL’s recent strength could not have arrived at a better time as investors wait out the headwinds of Syria, the FOMC chairman, and debt ceiling. By year-end, investors might just look back upon the performance of the above-mentioned previous laggards over the past few weeks as the stabilizing forces that kept the bullish technical formation for the SPX intact and prevented a much larger corrective decline.

Figure 1 NASDAQ 100 (NDX), September 2012 to September 2013
9 10 Terranova 1-1.1
Source: Bloomberg

Figure 2 S&P 500 Index (SPX), September 2012 to September 2013
9 10 Terranova 1-1.2
Source: Bloomberg

Past performance is not a guarantee of future results.

Virtus Investment Partners provides this communication as a matter of general information. The opinions stated herein are those of the author and not necessarily the opinions of Virtus, its affiliates or its subadvisers. Portfolio managers at Virtus make investment decisions in accordance with specific client guidelines and restrictions. As a result, client accounts may differ in strategy and composition from the information presented herein. Any facts and statistics quoted are from sources believed to be reliable, but they may be incomplete or condensed and we do not guarantee their accuracy. This communication is not an offer or solicitation to purchase or sell any security, and it is not a research report. Individuals should consult with a qualified financial professional before making any investment decisions.