We told you to sell US stocks last November 10, when the Dow Jones Industrial Average traded 13% above today’s close. If you haven’t, sell now. If you have to buy something, buy emerging markets, which actually gained today while US stocks crashed.

But don’t be in a hurry. As Morgan Stanley’s chief equity strategist Michael Wilson told CNBC, it will take quarters, not weeks, to restore confidence in a market that has been battered by trade war, galloping deflation, shrinking world trade, challenged Chinese growth, and political malfunction in Washington, London, Rome, Brussels and other capitals.

The Dow Jones Industrial Average fell 670 points, or 2.7%, before closing down 2%.

After the worst December for US stocks since 1931, don’t expect investors to start bottom-feeding until the new year. Too many things can go wrong, for example:

  • West Texas crude at $46 per barrel raises fears of deflation
  • The Federal Reserve thinks that inflation risk is “symmetrical,” which means it needs to raise rates to contain the prospect of inflation just while the bottom is falling out for parts of the global price structure
  • The “tech war, not a trade war” escalated by another ratchet-turn today when the US Justice Department denounced China as a habitual technology thief
  • European bank stocks fell to their lowest level since middle of 2016 after the Federal Reserve raised US interest rates. They owe about $12 trillion in US dollar liabilities and face a balance sheet squeeze as dollar financial conditions tighten
  • President Trump threatened to shut down the government after Congress failed to fund his proposed wall on America’s border with Mexico
  • Trump meanwhile faces a set of legal challenges that might paralyze his presidency

Every major sector of the S&P 500 fell. The one notable gainer was the emerging markets equity ETF (ticker EEM), up by over 1% just before the market close. That’s remarkable, for two reasons. First, some major components of the emerging markets index trade with oil (for example Russia, down almost 5% today). Second, emerging markets usually get pneumonia when the S&P sneezes. All the air has been let out of emerging markets, which led world equity markets down earlier this year. The forward-looking price earnings ratio for EEM is just 10x now, vs. 15x for the S&P 500. Price to cash flow for EEM is just 7x, compared to nearly 18x for the S&P 500. In a world where cash is king, emerging market stocks throw off more than twice as much cash for the price as the American index.

Emerging markets, meanwhile, are no riskier than the S&P 500. The Chart of the Day below shows the cost of hedging EEM in the options market vs. the cost of hedging the S&P 500. That’s the implied volatility on EEM options vs. the VIX index of S&P 500 options. So: double the cash flow for the price, at the same level of risk.

emerging markets less risky S&P

Wednesday’s returns by country are shown below. Oil-dependent Russia was the worst, Brazil with a new free-market government is the best.

Russia -4.6%
Nigeria -0.6%
China -0.1%
S.Africa 0.0%
Pakistan 0.1%
Poland 0.6%
Non-Japan Asia 0.6%
Peru 0.7%
Taiwan 0.9%
EM Index 1.0%
Indonesia 1.1%
Malaysia 1.1%
S.Korea 1.2%
Turkey 1.5%
Thailand 1.6%
India 2.0%
Philippines 2.1%
Mexico 2.1%
Brazil 2.2%