The Russell 2000 has surged more than 250% since the March 2009 bear-market bottom, outpacing the Dow 30, S&P 500 and NASDAQ 100 by a wide margin, according to a recent report by the Wall Street Journal. These dynamics have many analysts asking just how long the small-cap market can rally without a retracement.
The WSJ quotes MKM Partners' Jonathan Krinsky as saying that "forward returns for the next few months seem neutral at best, with a fairly significant risk of a 5-10% pullback."
Investors looking for small-cap exposure may want to look outside of the U.S. for diversification. International small-cap funds haven't been performing as well as U.S. small-cap stocks and may offer a more attractive risk-reward profile at these levels, particularly for individual investors.
Funds are flowing into U.S. healthcare ETFs at the fastest rate in at least six years due to the booming biotechnology and pharmaceutical sectors. According to Bloomberg, more than half the money flowing into U.S. sector-based ETFs in January and February went into healthcare funds.
Global healthcare ETFs haven't seen as much capital inflow as domestic ETFs, but the dramatic rise in projected spending in developed countries around the world should drive them higher over the long-term.
Sweden's economic recovery is expected to be the fastest in the Nordic region, according to the European Commission, driven by consumer spending and rebounding investment. The country's GDP is expected to grow 2.5% this year and 3.3% in 2015, which also makes it among the fastest growing in the larger European Union.
"The Swedish economy now follows a more robust growth track and economic activity is expected to gradually accelerate," said the EC report. "Gross fixed capital formation is expected to rebound sharply in the coming years, adding a new engine to economic growth."
Investors looking to capitalize on Sweden's growth may want to consider ETFs like the iShares MSCI Sweden ETF (NYSE: EWD) or the larger Global X FTSE Nordic 30 ETF (NYSE: GXF).
Denmark's banks warned hedge funds that bets against the country's mortgage industry would be ill-advised but hedge funds continue to bet against the country's housing market.
Nykredit Realkredit A/S told Bloomberg that speculation that the AAA-rated Danish economy may be headed for a debt crisis ignores some basic facts. Near record low yields at mortgage bond auctions last week seem to confirm this sentiment among the general investment public - at least for now.
Hedge funds like Owl Creek are looking at household debt that stands at about 321% of disposable income, a world record that the OECD warned against in November. Since these are financed by short-term bonds, households may be vulnerable to interest rate swings that encourage unusual fiscal policy.
What will happen remains to be seen, but Denmark's economy is certainly unique with its low public debt and big welfare state.
China's businesses have been increasingly borrowing foreign money to finance their expansion. With these changes in capital flow, one of the world's largest economies could be more susceptible to the whim of global investors. Figures from the Bank for International Settlements estimates that these cross-border borrowings amount to more than $880 billion.
While a large-scale currency crisis seems unlikely, some economists insist that the country's banking system resembles that of Japan during the 1980s in the years leading up to its crash and subsequent "lost decade". If the dollar were to appreciate, it could cause problems for many banks that have made loans in dollars given the borrowers' yuan-based business.
Germans may have a justified fear of hyperinflation. In 1914, the mark-dollar exchange rate rose from 4.2-to-1 to a peak of around 4.2 trillion-to-1 by November of 1923. Germany has had an irrational fear of inflation ever since those days to the point where it may be putting the eurozone's future at risk.
The Organization for Economic Co-operation and Development ("OECD") has warned that Germany's deeply embedded fears of inflation could put the single current's future at risk. Inflation in Germany needs to raise its inflation rate a little bit in order to see a 2% eurozone inflation average.
New Zealand's economy has been rapidly growing with a high-yielding currency but some economists are concerned that dangerous factors may be underlying the growth. For instance, high debt and credit with low savings rates and current account deficits were widely responsible for Europe's issues.
Some cyclical factors have supported the kiwi's rise but there are many risks that remain in the form of slowing growth in China and the U.S. Federal Reserve's tapering. Whether or not these factors will ultimately lead to a pullback in New Zealand remains to be seen but investors should be cautious either way.
Growth in developed countries is expected to pick up during the first half of 2014 and stabilize, according to data from the Organization for Economic Cooperation and Development ("OEDC").
Leading indicators suggest that developed countries are taking the reins from many developing countries following the 2008 global economic crisis. The U.S., U.K., and Japan are all expected to pick up during the first half of the year, with the eurozone also expected to see some growth acceleration.
While these indicators remain very positive, there are many key risks that remain within the global economy. Developing country banks have raised interest rates to try and retain capital in moves that could destabilize emerging markets. It could take some time for these markets to restore their past growth rates and the economic vibrations could have an impact worldwide.
The Fragile Five economies came into focus in 2013 and 2014 as emerging market economies that relied on foreign investments to cover current account deficits and finance growth began to see capital outflows as a result of improvements in developed economies and tapering on the part of the U.S. Federal Reserve.
While the initial collapse of emerging markets following Argentina's devaluation drew concerns of a dire future, many analysts have tamed their predictions for the future. The reality is that the decline in emerging markets is simply part of the same boom-bust cycle that's been happening for decades.
For guidance, investors may want to consider the last big hit to emerging markets: Russia's collapse in 1997 after defaulting on its external debt but recovered within a few years. The only constant has been the volatility in emerging markets which should preclude some investors from partaking.
With the markets trading down quite significantly so far this year, many investors are likely struggling with the loss aversion trap. That is, when investors hold onto stock or bonds that have lost their fundamental appeal in order to recoup their losses and avoid selling for a realized loss.
That said, the recent sell-off could also have yielded some big opportunities for investors. Some analysts believe that emerging market stocks at current prices represent the best buying opportunity, anywhere, any time, in any asset class, since the mini-crash of 2011, according to a recent Fortune article.
The key for investors is determining whether to sell stocks to avoid loss aversion or to hold onto them because they are irrationally undervalued after the steep drop.