The Buzz

All markets and investing news all the time

Investors should stop freaking out

January 30, 2014: 1:06 PM ET
The only thing more fragile than these five emerging markets is investor confidence. But it's time to stop panicking.

The only thing more fragile than these five emerging markets is investor confidence. But it's time to stop panicking.

The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney, Abbott Laboratories and AbbVie, La Monica does not own positions in any individual stocks.

Sit back and have a shot of Turkish Raki. Or a nice glass of Chenin Blanc from Cape Town. Maybe a Caipirinha so you can pretend you are on a beach in Rio.

In other words, relax.

Yes, there are legitimate worries about currency gyrations and economic turmoil in Turkey, South Africa and Brazil -- three of the so-called Fragile Five of emerging market economies. (India and Indonesia are the other two. I'm glad we've given up on acronyms. IBSIT? TIBIS? SIBIT? BIITS? And would we need to add the A for Africa or is S for South sufficient?)

Although the market bounced back nicely Thursday, traders have lately been acting like Peg, the little girl on the new PBS show "Peg + Cat" -- a favorite of Buzz, Jr. ... and his Dad.

In every episode, Peg gets unraveled by something and screams, "I'm TOTALLY freaking out!" But she's able to calm herself down by counting backwards from five. I suggest investors do the same.

This is not a panic situation. The stock market volatility of the past week is actually refreshing. It's proving to investors that stocks don't always go up. That's not the worst thing in the world. With the S&P 500 rising nearly 30% last year, stock valuations were starting to look stretched.

The woes of the Fragile Five (not to be confused with the old Fab 5 University of Michigan basketball team from the early 1990s ... although the thought of government leaders wearing baggy shorts like Chris Webber and Jalen Rose makes me chuckle) are a welcome reminder that traders are a fickle bunch.

Click photo for cool Bleacher Report piece on the Fab 5 and the NBA. (Bleacher, like CNNMoney, is owned by Time Warner.)

Money has left these emerging markets mainly because they are no longer as attractive as they used to be now that the Federal Reserve has decided to cut back on its bond purchases. The same thing has happened to Argentina and its peso. (Should it get added to the list so we can dub the group the Shattered Six?)

The Fed's tapering makes the dollar mightier and, therefore, wreaks havoc on the lira, rand, real, rupee and rupiah. This appears to be a simple case of asset rotation as opposed to a true economic crisis.

Related: Worst is yet to come for Fragile Five

Of course, each individual emerging market has its own quirks. Some are more fragile than others due to political unrest. (It makes me wonder if some guy named Gordon Sumner needs to record a new version of "Fragile" -- with the benefits going to help bolster their large account deficits.)

But the good news here is that this may not be a contagion that's going to lead to another big global recession. In fact, emerging markets should ultimately wind up in better shape down the road because of what the Fed is doing.

Think about it. The Fed is only tapering because the U.S. economy is improving. We've now had two quarters in a row of solid GDP growth to back that up.

If the U.S. continues to rebound ... and if Europe and Japan follow suit ... then that can only be considered a good thing for emerging markets. Decoupling is a myth.

Strength in the three big developed world economies can only help lift emerging market economies, as American, European, Japanese consumers and businesses buy more stuff ... particularly commodities and raw materials.

An emerging market rebound is not going to happen immediately. And China is a huge wild card here. Everything can change if its banking problems become more severe.

Related: This is not a repeat of 1997 for emerging markets

But people have to stop tossing around words like contagion and crisis every time the U.S. stock market goes down more than 1% on any given day. Sure, investors seem to be pretty nervous.

CNNMoney's Fear & Greed Index is now showing levels of Fear. The index was in Extreme Greed territory a mere month ago.

However, if you look at one of the key components of our index, the CBOE Volatility Index or VIX (VIX), it shows that investors are nervous but not outright terrified.

While the VIX is up more than 20% so far this year, it's off a very low base. The VIX, which many on Wall Street still view as the preeminent fear gauge, is nearly 25% below the 52-week high set last October when investors were busy worrying about a possible U.S. debt default.

So even with this year's spike, you could still say that fear is in a bear market. And when you look back further, the current level of the VIX is nothing compared to the truly frightening days of the 2008 credit crisis.

The VIX is now hovering around 16. A general rule of thumb is that a value above 30 shows intense fear. In the aftermath of the collapse of Lehman Brothers, the VIX hit a peak of nearly 90! It's been relatively calm the past few years as stocks have rallied.

What's going on now is PG-13 fear. It's mildly unsettling. It's not NC-17 fear with graphic images that should make you scared to turn off the lights at night.

Reader Comment of the Week! It's been a trying week for investors. But one blue chip tech stock has held up quite well amidst the choppiness: Microsoft (MSFT). That led to this gem of a tweet about the company's search for a successor to Steve Ballmer.

Ha! Good one, Maria. But something tells me that once Microsoft does name a new CEO, investors won't be thrilled to see him or her leave that quickly. And for what it's worth, I still think Microsoft should hire Adobe (ADBE) chief Shantanu Narayen!

  • Wake up! Investors are way too complacent

    The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney, Abbott Laboratories and AbbVie, La Monica does not own positions in any individual stocks.

    The stock market may have more room to run. But it's starting to look like investors are getting a little too complacent.

    If the zombie apocalypse actually were to happen, stocks would probably surge because investors MORE

    - Oct 22, 2013 1:08 PM ET
    Posted in: , , ,
  • Stocks are up, and greed is back

    With stocks back in record territory, investors are getting greedy again.

    CNNMoney's Fear & Greed Index shot back into Greed mode Thursday for the first time since late May, as the Dow and S&P 500 rallied above their record closing highs from May, and the Nasdaq climbed to its highest level since October 2000.

    The return of the bull comes as investors have started feeling more confident about future policy decisions from MORE

    - Jul 11, 2013 2:42 PM ET
  • Investor fear on the rise

    Political gridlock in Italy is unhinging investors.

    Investors worry the results of Italy's election could wind up undermining the progress that Italy has made in overhauling its troubled economy.

    "It was the worst possible outcome, feared by market participants and European policy-makers alike," said Daiwa Capital Markets European economist Tobias Blattner.

    U.S. stocks spiraled downward in a late-day frenzied sell-off Monday. European markets followed their cue and sold off sharply early Tuesday.

    CNNMoney's Fear MORE

    - Feb 26, 2013 10:15 AM ET
  • Beware of investor complacency

    Investor malaise has settled in like a hot summer day. And it's just as uncomfortable.

    "Our volume is as muted as it can be and the VIX is down sharply," said John Kosar, director of research at Asbury Research in Schaumberg, Ill.

    Kosar is talking about the Chicago Board of Trade's volatility index (VIX), Wall Street's notorious fear gauge. It has barely budged above 20 during the past month. It is now MORE

    - Aug 7, 2012 9:49 AM ET
  • Investors run for cover as fear intensifies

    If you thought last week was bad, it's just gotten a lot worse.

    A series of disappointing manufacturing reports were topped off Friday with dismal jobs numbers that showed a paltry 69,000 jobs were added to the U.S. economy in May.

    Related: Behind the jobs report

    If that's not enough to give you agita, the yield on the 10-year note tumbled to a record low of 1.46% today. It's not MORE

    - Jun 1, 2012 2:35 PM ET
Fear & Greed
Sponsored by

To view my watchlist

Not a member yet?

Sign up now for a free account
Stupid Stock Move of the Day
#StupidStock Move of the Day! Yes. Before 10. $CSCO up on buy rating? Sure, it's safe dividend tech. But isn't Heartbleed router news bad?
Powered by VIP.