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What Do Future Gains in the US Market Depend On?

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U.S. stocks have surprised many this year, but Russ discusses why future gains are dependent on a so-far missing spark: stronger economic growth.

Against most expectations, U.S. stocks are turning in a respectable performance this year. The S&P 500 is now up 7% year-to-date, recovering from what would charitably be described as a shaky start to the year (source: Bloomberg). That’s the good news.

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Market Realist – S&P 500 recovering after a shaky start

As you can see in the chart above, as of September 12, 2016, the S&P 500 Index (SPY) (IVV) has risen ~6% YTD (year-to-date) after having fallen 9% YTD at one point at the start of the year. Emerging markets (EEM) have outperformed so far in 2016, rising 15%—almost double the rise of the S&P 500.

Developed markets (EFA), on the other hand, have risen as little as 1% YTD. The Nikkei 225 Index (EWJ) has fallen 10%, while the FTSE 100 Index (EWU) has risen 10% YTD.

What has caused emerging markets to outperform?

Improving fundamentals in emerging markets and higher commodities prices have helped emerging markets to deliver higher returns. In her speech at the recent Economic Symposium at Jackson Hole, Federal Reserve chair Janet Yellen was optimistic about another rate hike in the United States.

However, market data show that investors currently expect a 60% chance of a December rate hike, while 36% see the chance of a September hike. The fear of multiple rate hikes in the United States has abated. This has been benefitting emerging markets so far.

While returns have been fairly decent so far this year, sustainability seems to be the question. In the next articles, we’ll discuss headwinds for US equities.

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