A couple of months ago I focused on the beginnings of a correction in world markets and the implications that had for the US market. Since then, things haven’t gotten any better. In fact, if the world markets don’t stage a sharp turnaround, a bear market is almost inevitable in the United States.
Several of the Middle Eastern markets have continued to sink. The Egyptian Hermes and the Dubai Financial Market Indexes have all extended their losses and now stand 40% and 60% below their all time highs. These losses are severe and will have an effect on the larger world exchanges. These are similar losses that the Asian markets experienced before the 1997 correction in US markets and the Russian market experienced before the 1998 Long Term Capital Management implosion.
Source: Bloomberg
If we step back and look at more developed world markets, not just emerging markets, we see a somewhat less ominous picture. The Dow Jones Global Exchanges, which closely tracks some of the world’s more established exchanges, shows that while this correction has taken out one steep trendline, the world markets are approaching a second area of support from another rising trend line.
Source: Bloomberg
World markets are clearly at risk of a continued melt down. While it’s easy for US investors to disregard the poor action in emerging markets, investors need to heed the lessons of 1998 and be aware of the interconnectedness of all markets. Losses of 60% in some emerging stock exchanges will be felt in every market around the world. If these markets don’t stem their losses soon, the reprocussions will be felt in the United States in the form of a 20% downdraft.
Strength alone knows conflict, weakness is below even defeat, and is born vanquished.
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