Emerging markets have been in the news a lot this week.
Volatility in EM seems to have finally spilled over into developed markets around the world, like the U.S. stock market — a dynamic the chart below from the Goldman Sachs equity strategy team captures perfectly.
The correlation between EM and and U.S. equities plunged in 2013 as portfolio outflows from emerging markets caused those stocks to fall, even as U.S. equities marched higher.
However, in 2014, this correlation has been coming back a bit as U.S. equities have had trouble finding solid footing in the new year.
Hence, the question: how much longer can this correlation remain at historically low levels? Massive inflows into EM in recent years finally started to reverse in 2013, but there may still be a long way to go as the Fed continues winding down its quantitative easing program.
If the past week is any indication, it may become increasingly harder for U.S. stocks to march to the beat of their own drum as the fallout in EM intensifies.
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