Are You An Investor Or Speculator?

October 28, 2015

5-Year Trailing Results

Diversified portfolios have trailed the S&P 500 for several years. Understandably, investors are questioning diversified exposure.

However, all else being equal, if currencies would have stayed stable over the last five years, diversified portfolios would be largely in line with domestic results.

Weighted Major
Currency Dollar
YTD -5.29% -5.28% -15.48% 8.90%
1 Year -0.61% -8.66% -19.28% 15.21%
3 Year 12.38% 5.62% -5.26% 8.09%
5 Year 13.33% 3.98% -3.57% 4.11%

Source: Data through 9/30/2015. Bloomberg.

Let’s focus on the last three years’ trailing results. The MSCI EAFE Index has trailed the S&P 500 by 6.76 percent annualized. However, during that same time period, the U.S. dollar (USD) has appreciated by 8.09 percent a year versus a world currency basket. Therefore, adjusted for currency movements, international stocks may have actually outperformed the S&P 500 over the last three years.

We recognize that weak currencies may have helped underlying international economies disproportionately to the negative impact of the strong dollar on S&P 500 companies. However, we are simply pointing to an impactful observation of a root cause.

Trying To Predict Commodity Prices

As investors have found in the last few years, predicting interest rates is incredibly difficult. If losing at predicting interest rates isn’t challenging enough, try predicting commodity prices.

A survey by Reuters of 27 top energy analysts at the end of 2013 predicted that the price of Brent crude oil would average $104.10 for 2014. Brent finished the year at about $65 a barrel and was below $60 a barrel a week later.

Prices for Brent are down more than 50 percent in the past 12 months. The drop in oil prices has had several byproducts. Obviously, natural resources stocks have been negatively impacted. However, low oil prices have also had a significant impact on emerging markets stocks and ETFs such as the Vanguard FTSE Emerging Markets (VWO | C-88) and the iShares MSCI Emerging Markets (EEM | B-100).

Many analysts would agree that a main driver of the oil price decline is a current supply glut. While overall demand is not down significantly, global demand is trailing supply growth. Particularly impactful to emerging markets, however, is that their biggest customer (China) is slowing. China is the 800-pound gorilla of commodities markets.

Estimated Current China Raw Material Consumption
Concrete Alum. Nickel Copper Oil Gold Coal Wheat Corn Rice
60% 54% 50% 48% 12% 23% 49% 17% 22% 30%


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