The U.S. equity markets have had mixed results over the last five business days due to the volatile ride of the Turkish Lira currency crisis. The S&P 500 ended the period with a small loss of .23%, the Dow Jones Industrial Average had a small increase of .23% and the tech heavy NASDAQ Composite was the biggest loser with a decrease of .85%. On the Fixed Income side, the U.S. Aggregate Bond Index was up .36%.
Last Friday, President Trump announced increased trade sanctions on Turkey, as a result of the Turkish government’s unwillingness to release an American pastor that was arrested and accused of aiding the failed coup attempted in 2016[i]. This sent the already beaten Turkish currency even lower. Year-to-date the Turkish Lira is down 35% against the U.S. Dollar, and the markets have expressed concern that the Turkish Government will not do what is necessary to defend its currency.
Traditionally, the two ways out of this mess are for the central bank to raise its rates or to enact capital controls. However, according to a recent Bloomberg article, this will not work for Turkey because it will crush their economy.[ii]
The markets fear that the Turkish currency problems will begin to affect other emerging markets; this phenomenon is called contagious currency crisis and has happened several times in the past. The chart below shows the emerging markets currencies vs. the U.S. Dollar. It is easy to see all the red, showing other currencies were also down.
Is this a reason to fear emerging market exposure? We certainly don’t believe this is the case. We look at our investment strategy over a market cycle, which is five years on average. Robert Luna, Surevest CEO & Investment Strategist, makes our case speaking to the TD Ameritrade Network. Listen in to see why Surevest does not think the Lira crisis will be detrimental to long term investors.
The Week Ahead
In the week ahead, we will be looking at the University of Michigan’s Consumer Sentiment Index for an insight on how the consumers view the economy, which is a predictor of their willingness to continue to buy goods and services.
[i] Bloomberg Radio (2018, August)
[ii]Ashworth, M. (2018, August 14). Turkey’s in a Mess. Capital Controls Won’t Help. Bloomberg. Retrieved from https://www.bloomberg.com/view/articles/2018-08-15/turkey-s-in-a-mess-capital-controls-won-t-help
-Luis Galmadez, Director of Research and Trading, Surevest Private Wealth