Emerging markets, as a group, remain more than 20% below their recent peak. A decline of 20% is the commonly accepted definition of a bear market. And, now, by that measure emerging markets are in bear market mode.

To measure emerging markets as a group, traders can turn to the iShares MSCI Emerging Markets ETF (NYSE: EEM). The chart of EEM is shown below.

After a 21% rally earlier this year that sparked hopes of a new bull market, the down turn has resumed.

Before digging into what the drop means, it could be helpful to define the terms. An emerging market is a country that has some characteristics of a developed market but does not satisfy standards to be termed a developed market.

This includes countries that may become developed markets in the future or were in the past. The economies of China and India are considered to be the largest emerging markets.

Emerging markets fit between developed markets and “frontier markets,” a term used to describe developing countries with slower economies than those that are considered to be emerging. This can all be confusing, so economists have tried to refine the definition.

Some definitions require an emerging economy to display the following characteristics:

• Intermediate income: its PPP per capita income is comprised between 10% and 75% of the average EU per capita income.
• Catching-up growth: during at least the last decade, it has experienced a brisk economic growth that has narrowed the income gap with advanced economies.
• Institutional transformations and economic opening: during the same period, it has undertaken profound institutional transformations which contributed to integrate it more deeply into the world economy. Hence, emerging economies appears to be a by-product of the current globalization.

But that definition, more than 50 countries, representing 60% of the world’s population and 45% of its GDP, are emerging. The ten largest Ems are, in alphabetical order, Argentina, Brazil, China, India, Indonesia, Mexico, Poland, South Africa, South Korea and Turkey.

Turmoil Is Spread Around the World

Often when emerging markets make a large price move, there is one region that stands out. That’s not the case right now. Problems in Turkey, Argentina and South Africa are ongoing and potentially serious.

iShares MSCI Turkey ETF (NYSE: TUR) is still more than 55% below its 2017 high.

Turkey is in the midst of a little noticed financial crisis. As Al-Montor.com reports, “The two main actors in the economic crisis gripping Turkey are the central bank, which runs the state’s monetary policies, and the Treasury, which is in charge of fiscal policies.

The central bank is ostensibly independent, while the Treasury is attached to Treasury and Finance Minister Berat Albayrak, who is also President Recep Tayyip Erdogan’s son-in-law.

Those who follow how things work on the ground are well aware that the central bank does not act independently and is subject to direct and indirect government meddling. The bank has long felt compelled to seek Erdogan’s blessing in its interest rate decisions.

Recently, it has come under pressure to let the Treasury use its resources and — again, at Albayrak’s behest — do something it should never do, namely directly or indirectly intervene in the foreign exchange market.

The bank’s role in foreign currency sales by Treasury-controlled public banks, aimed at curbing the slump of the Turkish lira, is a case in point.

The central bank’s transfer of funds to the Treasury is even more intriguing. Such transfers are not something new — in fact, they are required by law, given that the bank is ultimately a state-owned company that transfers part of its profits to the Treasury.

 This year, however, the transfer that was due in April was brought forward to January via a legal amendment ahead of the March 31 local polls. As a result, the Treasury — saddled with major deficits due to the government’s preelection populism — was able to get early some 34 billion liras ($5.6 billion) instead of borrowing on high interest rates.

The Treasury has now reportedly set an eye on the central bank’s legal reserves, which represent 20% of its profits and a sum the bank sets aside by law to use in extraordinary circumstances.

There are legal obstructions to the move, but given the government’s record on respect for the law, many are convinced it would not be discouraged by legal hurdles. Its only reservation seems to be that such a blood transfusion would lay bare the Treasury’s desperate situation for all to see, including the foreign money markets.”

There is a more traditional crisis in Argentina. Global X FTSE Argentina 20 ETF (NYSE: ARGT) is about 25% below its 2017 highs.

Here, the IMF is trying to bail out the country and the Financial Times notes, “When the IMF completed its third review of Argentina’s economy in early April, managing director Christine Lagarde boasted that the government policies linked to the country’s record $56bn bailout from the fund were “bearing fruit”. 

Less than a month later, amid darkening political prospects for incumbent president Mauricio Macri, the country’s currency crisis reignited and bond yields spiked, threatening not only the IMF’s Argentina programme but its reputation and that of its leader.”

iShares MSCI South Africa Index ETF (NYSE: EZA) is almost 30% below its 2017 highs as populist policies in that country threaten economic growth.

These three countries show that this crisis is different than other crises in the past. For example, in 2008, there was a common problem in emerging markets and developed economies as a credit crisis threatened the financial system.

That’s not the case this time and that indicates there could be different factors to consider when trading.

Safety Could Become Important

Traders are generally thinking about the possible returns on their capital. In other words, they are seeking opportunities to earn rewards of perhaps 10% a year on their investment accounts. In times of crisis, they often start to consider the importance of return of their capital.

When crises and bear markets hit, traders become increasingly concerned about losses of capital. They can react by putting their capital into investment opportunities that appear to be the safest. This explains why Treasury securities often rise in price when the stock market crashes.

In the current market environment, the crises are geographically diversified. Few stock markets around the world are in decisive bull markets with major stock market indexes at or near new all time highs. One market trading near new highs is the US stock market.

That means the US could offer safety to traders and markets in the country could benefit from a flight to safety trade. This could benefit large cap US stocks, the ones included in the S&P 500 index, for example, and US Treasury securities.

Treasuries could be beneficiaries of increased cash flow since they offer safety and the Federal Reserve is one of the few central banks in the world raising rates. That could make the market attractive to overseas investors.

In fact, that is what happened in the previous two emerging market bears. This is the third time EEM has fallen by at least 20% in the past ten years. Neither of the previous bears resulted in a bear market for US stocks.

In 2011, the S&P 500 Index fell 17.8% during the emerging market bear market. In hindsight, that was a buying opportunity for US investors.

The next emerging market bear developed in 2014. That time, the S&P 500 fell less than 7%. US stocks then rallied 12% before selling off by 12% as the emerging market continued for 16 months.

This time is probably the same as the other two times. US stocks could pull back but a bear market in the US won’t start until the US economy contracts. For now, there’s no sign of that.

As the last recession, and bear market, was accelerating, a research report identified the stocks that had performed the best in downturns. The study appeared in Forbes in December 2008 which was months before the end of the bear market in March 2009.

That provides an important opportunity to review how the study held up in real time. Before doing that, we can consider the results of the study:

“We scanned Forbes’ list of the Best Big Companies in America to see which ones held up best this year and during the last recession in 2001.

We required these stocks to have a positive price change over the two most recent economic downturns–Jan. 1, 2008, to Nov. 28, 2008, and March 1 through Nov. 1 of 2001.

Our list shows a few common theories hold true. One such concept is that people will still need basic goods, such as food or consumer products, even in tough times.

Church & Dwight Co. is a perfect example. The Princeton, N.J., company, which dates back to 1846, makes a variety of cleaning products and personal care items under its Arm & Hammer brand.

General Mills and Ralcorp Holdings , which both process breakfast cereal and other food items, also show share price gains during the past two recessions.

Another common belief is that with fewer dollars to spend, shoppers will seek bargains. Family Dollar Stores, Ross Stores and Wal-Mart Stores all fit this mold.

Buying items in bulk is another way to save in tighter times, an area in which BJ’s Wholesale Club specializes.

One theory that has not held up, especially in 2008, is that financial services are a safe place to invest during a downturn. We have only identified one Platinum 400 bank, Hudson City Bancorp that met our screening criteria.”

The companies identified are shown in the table below.

Source: Forbes

Prices as of Nov. 30, 2008.

*March 1, 2001, through Nov. 1, 2001.

**Jan. 1, 2008, through Nov. 30, 2008.

***The ending value of $100 invested in the stock, divided by the ending value of $1 invested in the S&P 500.

Based on the cutoff date of the study, it is possible to see how the stocks fared in the bear market that laid ahead of them at the time the study was published. The S&P 500 was, in hindsight, far from a bottom with the recovery more than three months away. Stocks would fall more than 20% after this study was published.

It is not possible to recreate all the history because of limitations of data. Not all companies are still traded.

BJ’s Wholesale Club Holdings, Inc. (NYSE: BJ) was taken private after the recession ended and is now trading again, since last September. The break in trading history limits the ability for analysis of how the stock held up in 2009.

Cephalon was acquired by Teva, and again is not available for analysis. Family Dollar Stores was subsequently acquired by Dollar Tree.

Other stocks on the list that were acquired include Genentech, Hudson City Bancorp, Panera and Ralcorp.

Church & Dwight Company (NYSE: CHD) lost a little more than 30% in the 2008 – 2009 selloff, significantly less than the S&P 500 Index which lost about 55% over that time.

Flowers Foods, Inc. (NYSE: FLO) also lost less than the S&P 500 but still suffered a significant loss.

General Mills, Inc. (NYSE: GIS) is shown next.

Hasbro, Inc. (Nasdaq: HAS), Ross Stores, Inc. (Nasdaq: ROST), The Kroger Co. (NYSE: KR) and Walmart (NYSE: WMT) all loss less than the S&P 500 with WMT faring the best, losing just about 27%.

Spartan Stores is now known as SpartanNash (Nasdaq: SPTN). The stock lost more than S&P 500 during the bear market.

This brief look at the data shows the problem with trying to profit in a recession and a bear market. History shows that the average bear market decline associated with a recession is about 35% and most of the stocks trading in 2008 and 2009 lost at least that much.

An interesting conclusion from the study of the winners in the 2001 recession is that no two recessions are alike. Stocks that showed gains in the bear market that began in 2000 failed to do so in the next recession.

Investors are often reminded that past performance is not a guarantee of future performance and this means no investment manager is guaranteed to deliver results in the future that mirror the results of the past. That fact does seem to be well understood.

But stocks are also unlikely to perform the same in the future as they did in the past. The winners in the last recession, or in the recession before the last recession, may not be the winners in the next recession.

That actually makes sense since not all recessions are alike. In 2000, the recession followed a bubble in internet stocks and technology stocks were among the worst performers in that bear market. But that recession was relatively mild and the recovery began in a fairly normal manner.

Efforts to jump start the recovery after the next recession were anything but normal. Interest rates were cut to 5,000 year lows, not just in the United States but in major economies around the world. That recession was preceded by a financial crisis, with the home mortgage market being a central focus of the financial damage.

The differences in those two recession and recoveries make it obvious that the next recession and recovery will be different. It is extremely unlikely subprime mortgages will create a global credit crisis in the future. Regulators around the world have taken steps to guard against that.

Yet, there is a future crisis that regulators have failed to foresee. That is not a fault of the regulators who are doing all they can. It is simply the nature of a crisis. It must be unforeseen or else prudent regulators, business executives and investors would avoid the problem.

Gold prices have been in a trading range for some time and could be considered bullish based on the chart. Prices are near the upper end of the range and holding above an important support level that has been in place since late 2017.

Investors value gold for many reasons. Some see the yellow metal as protection against economic collapse. These investors tend to accumulate physical gold as coins or bars believing they will be able to use their gold to prosper under extremely adverse economic or social conditions.

Other investors believe the financial system will continue to function in the future but acknowledge gold tends to rise under adverse conditions and maintain positions in the metal through investment accounts owning ETFs, futures or gold mining stocks.

Some investors simply view gold as a trading vehicle to be bought in up trends and sold in down trends.

Of course, it is possible to directly trade gold. This can be done with coins, ETFs or futures. Coins are collectibles and can have tax consequences that are different than investments in stocks.

Many investors are surprised to learn popular ETFs that back their shares with physical holdings of precious metals face taxes at the higher rate for collectibles. This includes SPDR Gold Shares (NYSE: GLD).

Futures carry their own tax consequences and risks and many individual investors avoid these markets.

Publicly- traded stocks of gold miners offer an indirect way to invest in gold. Mining companies are taxed at the same rate as stocks which is lower than the rate for gains in GLD or other ETFs.

In addition to offering tax benefits, gold miners also offer the benefit of leverage. An example might be the best way to explain the leverage miners offer.

Let’s assume it costs a miner about $800 an ounce to produce gold and they mine 1 million ounces a year. If gold is at $1,000 an ounce, (a number used for simplicity) the company should generate a profit of about $200 an ounce or $200 million

This is a simplified example so we will assume the company has no other costs and no additional revenue. If the price of gold increase by 30%, to $1,300 an ounce, assuming the costs of production stayed the same, the miner’s profits would increase to $500 an ounce or $500 million for the company, an increase of 150%.

The miner is leveraged, in this example, 5 to 1, and benefits immensely from higher gold prices. Even smaller gains in the price of gold have a large impact on earnings. A 1% increase in gold prices (to $1,010 an ounce) results in a 5% jump in the earnings of this hypothetical mining company.

Remember, there is no free lunch in the stock market. Leverage can help increase investment returns on the upside but can cause significant losses on the downside.

A 1% decline in the price of gold could result in a 5% drop in earnings for this gold miner and we would expect the stock price to reflect the diminished earnings potential of the company. A 20% decline in gold would push the miner from a profit to a loss.

This leverage makes gold miners an excellent way to invest in gold. Buying miners when gold prices are low can lead to large gains when the price of the metal recovers.

With gold potentially poised for a breakout, now is the time to look for bargains in the mining sector.

We searched for gold miners using a free screening tool to find stocks offering value and trading under $5.

Many individual investors understand that low priced stocks could be appealing for two reasons. One reason is that the low price means they have little down side risk in dollar terms. The second reason is that low priced stocks are generally the ones that deliver the largest short term gains.

One study looked at how low priced, or cheap, stocks performed relative to more expensive stocks. The study found that cheap stocks delivered more than six times the average return of the more expensive stocks in a typical quarter.

That’s why we limited our search for potential bargains by focusing on stocks priced at less than $5 per share.

Finally, we looked for stocks with a  low price to sales (P/S) ratio, an indicator that the stock offers potential value.

One way to find stocks meeting these requirements is with the free stock screening tool available at FinViz.com. At this site, you could screen for a variety of fundamental factors, high levels of institutional ownership and bullish institutional transactions. An example is shown below.

Source: FinViz.com

This tool is flexible and could be applied to other industries besides gold mining. Different criteria, both fundamental and technical could also be applied.

Remember, there is no guarantee any stock will increase in value. Also, it is important to remember when we search for stocks using quantitative measures, our goal is to identify stocks that meet those criteria. The screens we develop could be used as the cornerstone of long-term investment strategies but any individual stock in the list could be a winner or loser.

Our search identified nine miners meeting these requirements.

Source: FinViz.com

Any of these stocks could be a potential winner and all worth further research. They are cheap enough in price that an investor could consider a diversified investment in gold miners to benefit from higher prices in gold.

They are also cheap in value, at least when value is measured by the P/S ratio. However, there are still risks with any stock and traders could consider stops to protect against large losses. An initial stop is often used to mitigate the risk of the stock not moving in the intended direction.

After a time, if the stock does move higher, investors can consider a trailing stop to potentially preserve profits and offer a disciplined strategy for exiting trades to move assets into other potential investments that could offer greater potential rewards.