Combine the extremes, and you will have the true center. -- Karl Wilhelm Friedrich Schlegel
NEW YORK (TheStreet) --When consensus opinion reaches an extreme, it is often wrong. We could very well be seeing that here regarding fears of the Federal Reserve tapering its quantitative easing (QE) this week and its supposed negative effect on emerging markets.
All year long we've been hearing the same story, that any Fed tapering will disproportionally hurt the emerging markets as money will flow out of emerging countries in search of safer U.S. assets.
Let's think this logic through, step by step.
If tapering is supposedly disproportionately bad for emerging markets, then the endless quantitative easing over the past few years should have been disproportionately good for emerging markets. Not only has this not been the case, but the opposite has been true.
The chart below illustrates a price ratio of emerging markets -- as seen by the SPDR S&P Emerging Markets (GMM) exchanged-traded fund -- to the S&P 500, as seen through the SPDR S&P 500 ETF Trust (SPY). A declining ratio as we have seen over the past few years indicates that the numerator (emerging market equities) have significantly and consistently underperformed the denominator (S&P 500). As emerging markets have clearly not benefited from quantitative easing, then, why should we assume that a reduction or elimination of the program will have a deleterious effect?
Select the service that is right for you!COMPARE ALL SERVICES
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV