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?)
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.
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.
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.
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!
Not a member yet?Sign up now for a free account