Unlike the S&P 500
Emerging Markets' Significance
In terms of the broader market, emerging markets are considered a leading indicator of risk appetites. Typically, periods of stock market strength correlate with outperformance in emerging markets as investors grow more risk-tolerant and seek out higher returns. Additionally, emerging markets are more leveraged to global growth as well.
Therefore the lack of leadership from emerging markets this year and continued underperformance despite strength in developed market stocks, is certainly concerning. This divergence can resolve in three ways. One possibility is that emerging markets catch a bid and start outperforming. This is currently happening with small-caps and cyclical stocks.
Another option is that the underperformance in emerging markets is an indicator that the rally in equities is vulnerable to a retracement. If stocks do start selling-off, emerging markets will lead to the downside. The third option is the most unexciting - the status quo lasts for another long period, frustrating both bulls and bears.
Emerging Markets' Composition
Emerging markets are primarily composed of four countries - China, India, Russia, and Brazil. These countries are grouped due to their relatively large size and rapid growth rates. However, each has its own set of strengths and weaknesses. A decade ago, these countries were primarily export-dependent, so they tended to trade in-step with each other in terms of growth and stock prices.
However as their economies have matured and become more consumer-centric, their fortunes are diverging as well. For example, India's stock market
Both Russian and Brazilian stocks' performance is closer to India than China. The bulk of emerging markets' weakness is due to China. Absent China, it's likely that the sector would be at new highs like other global indices. China's struggles are due to its monstrous debt overhang, deleveraging, and trade tussle with the US.
Ignore EEM Underperformance
Due to this, bears should not overweight this lack of confirmation. Instead, they should look at other cyclical stocks that are significantly outperforming for the first time in years.