After a long run of record highs throughout the year, U.S. investors aren’t used to losses like we saw last week. But the 2% drop in the S&P 500 (INDEXSP:.INX) pales in comparison to some of the declines in several different markets around the world. Let’s take a look at some of the financial markets that suffered much more dramatic losses last week.
1. Emerging-market stocks.
Stock markets around the world did relatively poorly, but emerging-market stocks had especially bad performance last week. Some of the hottest areas of the world were among the worst performers, with the iShares Silver Trust (ETF) (NYSEMKT:SLV), iShares MSCI Mexico Inv. Mt. Idx. (ETF) (NYSEARCA:EWW) and the iShares MSCI Brazil Index (ETF) (NYSEARCA:EWZ) plunging almost 8% each. Mexico in particular has drawn attention for some time, with analyst firm UBS AG (ADR) (NYSE:UBS) referring to the Mexican stock market as being in a bubble. Brazil, however, has more difficult economic problems. Public discontent is raging over the massive public spending for infrastructure projects related to the coming World Cup and Olympic Games within the next three years. Meanwhile, a return of inflation and a plunging currency have Brazilians worried about whether slowing growth will lead to a reversal of fortune for the rise of the middle class there. Both countries are representative of concerns going on throughout the emerging-market world, as people there have a lot more to lose than those in developed-market countries.
2. Precious metals.
With the Federal Reserve’s signaling that interest rates will head higher sooner rather than later, precious metals plunged. Gold had a massive one-day drop that helped send prices of the SPDR Gold Trust (ETF) (NYSEMKT:GLD) down 7% for the week, while iShares Silver Trust (ETF) (NYSEMKT:SLV) dropped an even more dramatic 9%.
As it becomes clear that inflation is no longer a threat, investors have moved away from the precious-metals markets. If the economy worsens to the point at which financial stability once again comes under threat, then gold and silver might come back into favor. For now, though, the tide seems to be moving against them.
3. Real-estate investment trusts.
Rate-sensitive REITs took another big hit over the week, with the Vanguard REIT ETF (NYSEARCA:VNQ) dropping more than 5%. Leveraged mortgage REITs saw even worse losses, with Annaly Capital Management, Inc. (NYSE:NLY) falling more than 7% and American Capital Agency Corp. (NASDAQ:AGNC) seeing 8% declines.
For now, leveraged REITs could actually benefit from the steepening yield curve, as long as they’re still able to get short-term financing at current low rates. If that liquidity dries up, though, then profits could fall quickly as REITs are forced either to pay more to borrow or to reduce their leverage.