What's Behind The Divergence Between The US, Emerging Markets?

After ending 2017 with a 19.4-percent gain, the S&P 500 Index is up about 6.9 percent year-to-date through Aug. 23, popping in and out of the record territory quiet often.

The bull market that began in March 2009, marking a recovery from the post-financial crisis slump in 2008, now has the distinction of the being the longest of its kind.

A comparison between the U.S. market, some other developed markets and emerging markets shows the latter two groups have not been as fortunate.

Here's how some developed markets have performed year-to-date:

• Hang Seng Index (Hong Kong): Down 7.5 percent.
• All Ordinaries (Australia): Up 3.1 percent.
• The Nikkei 225 (Japan): Down 1.6 percent.
• The CAC 40 Index (France): Up 2 percent.
• The DAX Index (Germany); Down 4.3 percent.
• The FTSE 100 (U.K.): Down 1.6 percent.

How did the emerging markets fare? Going by the iShares MSCI Emerging Markets Indx (ETF) EEM, their plight is even worse. The ETF has lost about 9 percent year-to-date.

Source: Yahoo

China's Shanghai Composite Index is off 17.6 percent, while Brazil's BOVESP is down a more modest 0.8 percent.

India's Sensex seems to have bucked the trend and is up about 12.6 percent year-to-date.

Where The U.S. Markets Scored

The outperformance of the U.S. market shows its resiliency, as the nation rebounded sooner and stronger from the financial crisis than other economies. The domestic economy is chugging along nicely, with the advance Q2 GDP estimates released last month pointing to robust 4.1-percent sequential expansion.

The U.S. economy has been supported by strong corporate profit growth. Factset's estimates put the profit growth of S&P 500 companies at a robust clip of 24.6 percent in Q2, the fastest since the 34.1-percent growth seen in the third quarter of 2010. Technology companies, especially the big ones, have led from the front and contributed significantly to the rally.

See also: Trump's $505B China Tariff Threat, Explained

Europe Faces Systemic Issues

Across the Atlantic, Europe has been plagued by crisis after crisis, including sovereign debt crisis and Brexit. Interest rates have generally been lowered to boost ailing economies, and the banking sector has been struggling.

Most recently, the collapse of the Turkish lira, fueled by a U.S. trade sanctions threat, spooked the global markets.

What's Ailing The Emerging Markets

The primary rift between the U.S. and emerging markets comes due to President Donald Trump's trade sanctions on China.

An offshoot of the trade tiff has been the strengthening of the U.S. dollar against most other major and emerging market currencies.

The U.S. Dollar Index, an index measuring the performance of the U.S. dollar against a basket of overseas currencies, has gained about 4 percent year-to-date.

The strengthening of the U.S. dollar is hurting emerging markets, as they typically thrive on commodity trade and have seen demand taper off as dollar-denominated commodities become pricier.

Fears of defaults on sovereign and corporate debt are on the rise, as emerging market debt is invariably denominated in dollars.

"The strength in the dollar has a lot to do with the volatility you've been seeing in emerging markets on top of local political issues. What's driving behind that is a central bank divergence," Shawn Cruz, senior trading specialist at TD Ameritrade, told Benzinga.

Higher U.S. rates — a corollary of the monetary policy normalization underway in the U.S. — are likely to lead to a flight of capital away from emerging markets and into higher-yielding U.S. assets.

Near-Term Outlook

Maneesh Deshpande, Barclays' chief equity strategist, recently revised his year-end price target for the S&P 500 Index from 2,900 to 3,000, according to CNBC.

This suggests a roughly 5-percent appreciation from current levels or an annual gain of over 12 percent.

Deshpande attributes his buoyant outlook to ongoing corporate earnings momentum.

Sino-U.S. trade tensions are continuing to be a pesky issue and could continue to be a dampener on global growth — specifically, growth in emerging markets, according to Moody's. 

"U.S. trade tensions with China will worsen this year, weighing on global growth in 2019," Moody's said in the August update of its Global Macro Outlook.

"Further tariffs, similar in magnitude to the newly proposed 25-percent U.S. tariffs on $200 billion of imports from China and 25-percent U.S. tariffs on all auto and auto part imports, represent a disruptive downside risk to our baseline forecasts."

If the global weakness is protracted, the U.S. cannot be completely immune.

TD Ameritrade's Cruz said the U.S. can hold out for a while, but eventually the global weakness will start to reverberate through the economy.

"We've been insulated so far, but I don't think that's sustainable," Cruz said. "Generally speaking, a lot of economists are thinking we can make it through most of 2019, and in 2020 there will start to be issues."

The analyst predicts the materials and industrial sectors will take an initial hit, with consumer sectors feeling the pain later.

Related Link: Cramer: The Bull Run Survived These 10 Challenges

Photo by Satish Krishnamurthy/Wikimedia.