September 19, 5:00 pm EST
Just two weeks ago, the Nasdaq was up 19% on the year, while the “blue-chip” heavy DJIA was up just 4%.
This is in a world where rates are low, corporate profits are growing at 20% and the economy is on pace to have above trend growth.
Great traders love when prices are detached from fundamentals, especially when it’s driven by fear or euphoria. This was a clear disconnect. And you could argue that there has been a bit of both fear and euphoria driving it (fear priced into the Dow about trade wars, and euphoria priced into the tech giants on the idea that the burgeoning monopolies would go unchecked forever until all competition is left for dead).
Both the fear and the euphoria were misguided for all of the reasons we discuss almost daily in my Pro Perspectives note.
And now we’re seeing a convergence. In just two weeks, that performance gap between the Dow and Nasdaq has now closed from fifteen percentage points to nine percentage points. And the Dow still has a lot of room to run. It remains just under the highs from January.
Now, yesterday we talked about the opportunity for Japan to benefit from forced trade reform in China. Other big beneficiaries? Emerging market economies.
In short, all of the countries that have been short-changed on their global trade competitiveness because of China’s weak currency policies, should benefit in a world where China is held to a standard of fair trade.
That’s why Japanese stocks had a huge run yesterday (and expect it to continue). And that’s why EM stock markets were big movers today. The Frontier Markets ETF (FM) is still down 14% on the year. With the idea that these countries may get a better crack at global demand, I suspect these stock markets could be in for a big bounce.