In a memorable line from one of my favorite movies, “A League of Their Own,” a baseball announcer (incidentally played by the fellow that also played Squiggy on Laverne & Shirley) exclaims “I have seen enough to know I have seen too much!” That pretty well sums up what I think of the first 6 ½ months of 2013. In 27 years in the investment business, I cannot recall a half-year in which so many different “turns of events” occurred. When markets change, they often change together. The technical term to describe this is “correlation” – the degree to which different market segments follow each other up and down.
Most investors based in the U.S. are walking around thinking “the market has gone way up this year.” They are right…if they are talking about certain indexes within a big wide world of markets, including stocks, bonds, currencies and commodities. But the disparity (i.e. lack of correlation) among markets has been striking. I think that the best way to convey this to you is to simply show you how a small group of market indexes have done for the year-to-date yesterday along with brief commentary, in bullet point form. Here we go…
- U.S. Stocks – S&P 500 up 18.8% – the “headline” U.S. stock market index has had a tremendous year so far. So has the Federal Reserve. The Fed has continued to support the stock market by buying a large chunk of what the U.S. Treasury issues (bonds) to fund our nation’s debt. That helps the stock market by making investors confident that the financial system is liquid, and keeps short-term bond yields low, which makes stocks look more attractive by comparison.
- Global Stocks (MSCI All Country World Index) up 8.9% – the U.S. is a significant part of this index, so obviously the rest of the world has not done as well by comparison.
- Emerging Market Stocks (MSCI Emerging Market Index) DOWN 10.6% – Latin American and Asian have had a rough start to the year. In particular, China’s economic growth is slowing. And while its growth rate is still well above many developed markets, investors are shunning China and its neighbors. As I opined in a recent blog post, this is short-sighted. But after all, we are talking about a short period in a long lifetime of most investors. Still, the disparity between U.S. and Emerging Market performance is gigantic so far this year, and I don’t expect that to continue indefinitely.
- 10 Year US Treasury Constant Maturity Index DOWN 5.55%. As investors are starting to figure out, the bond market is changing, and it is changing quickly. Rates on longer-term bonds have started to climb, and while the change in direction of rates (from generally declining for three decades to rising) could occur very gradually, I am more confident than ever that the big turn is occurring. This has tremendous implications for retirees and other income-oriented investors and we at Sungarden have a specific investment strategy that aims to address that issue.
- TIPS (Treasury Inflation-Protected Securities) DOWN 8.1%. Yikes! These investments are designed to protect the investor from an increase in inflation. But apparently not from a rise in rates that is NOT accompanied by an increase in the Government’s official Consumer Price Index (CPI). As for my view on inflation? Stay tuned, that will be covered in another blog post soon.
- Morningstar Long-Only Commodity Index DOWN 2.9%. Gold and Silver have crashed but oil has performed well. Those are the headlines. The other headline is that commodity investments are one of many market areas that should make investors realize that just because the S&P 500 is way up this year, it doesn’t mean that all portfolios are be up. Diversification means that you don’t get all of the ups or the downs. That simple investment tenet is often forgotten.
- Morningstar Lifetime Indexes (2020 Retirement Year)
- Conservative up 2.6%
- Moderate up 6.4%
- Aggressive up 9.9%
These indexes aim to track asset mixes for different types of investors who are targeting retirement in seven years (in the year 2020). Note that whether you were conservative, moderate or aggressive, your returns for the year to date through yesterday were well below the 18.8% gain for the S&P 500. That’s not a bad thing. Rather, it is a reminder that everyone has investment objectives, and for nearly every investor I know, performing like the S&P 500 is NOT their true objective.
Why? Because in 2008, you would have lost over 1/3 of your assets. And it is the balance of reward potential and prevention of major losses of capital that is the key to being successful as an investor, no matter who you are. Remember that and you will avoid the fate of many who are walking around this summer with either delusions about how well they are doing, or believing that they need their financial advisor to do more to “keep up” with “the market”…or the Jones’s?