NEW YORK ( TheStreet) -- iShares MSCI Emerging Markets ( EEM) weakness signals that tapering may come sooner than expected.
Last Friday's nonfarm payrolls number proved that the labor market was becoming more firm as data outperformed expectations. As economic data improves the Federal Reserve will eventually deem it acceptable to pull back on monetary easing. Asset markets reacted to the near-term potential of tapering by selling treasury bonds, gold and fleeing emerging market equities. Emerging markets, like the U.S. market, are heavily influenced by interest rates and the flow of excess capital. When monetary policy is accommodative, it allows for funds to spread through more markets and assets increase in value.
As bonds sold off in recent weeks and interest rates have risen rapidly, emerging market equities sold with similar velocity as seen in the chart below. Meanwhile, U.S. equities remained strong. Investors justified continued equity strength with the premise that a stronger economy warrants positive investor sentiment. This seems paradoxical, however, considering a weak economy and massive stimulus helped lift equity indexes to current record highs.
The likelihood in the long term is that a decrease in stimulus will be negative for markets. A stronger economy can justify higher interest rates but elevated rates are not conducive for strong equity markets.
Expect U.S. equities to follow emerging markets lower if we get tapering by year's end. At the time of publication the author had no position in any of the stocks mentioned.Follow @AndrewSachaisThis article is commentary by an independent contributor, separate from TheStreet's regular news coverage.