January 14, 2015 - Factors Overview
With all the interesting things going on in the world at the moment it is difficult to focus on just a few. A very strong US dollar, continued low interest rates, falling oil and gasoline prices, low inflation, a delayed recovery in Europe and Ebola – where do we start? Why not start with volatility since volatility is typically cited as a measure of risk in the stock and bond markets, and it creates the most investor angst. Keep in mind, however, that without risk in the investment markets, returns would be much less attractive as risk and return are closely related.

The S&P 500i finished the year at 2059, off its all-time closing high of 2090 just two days before. This was after a 12% or 228 point rise from a trough on October 15. Before this end-of-year run-up many investors who watched the market drop between Labor Day and mid-October may have been ready to throw in the towel. Despite this volatility, investors that hung in there were rewarded by the new highs in many US equity market indexes.

Most foreign stock markets have been beset by the same or greater volatility as the US markets. And at this point in time, most foreign market indexes are still in a downward or sideways segment of their cycle. Additionally, many US investors accessing foreign markets are subject to the downside of a strong US dollar. A strong dollar is great news if you are importing foreign goods or traveling abroad, it is not the best news if you own assets (stocks) denominated in foreign currencies.

At times like these one should remember the words of Mark Twain, “History doesn’t repeat itself, but it does often rhyme.” History tells us that it makes sense to stay diversified and ride out the storm that is currently the foreign markets. When we structure our global portfolios for investors, whether they are participants in 401(k) plans, individuals saving in non-qualified accounts or people already in retirement and engaged in a retirement income distribution strategy, we focus on the long term and we focus on employing diversification across geographies, asset classes and index styles. You may not remember, but in 1993 the S&P 500 was up 10% but foreign and emerging market stocks as measured by the MSCI EAFE and Emerging Markets indexes were up 33% and 75% respectively. If you were not diversified overseas you did not participate in these returns. In 2002 the S&P 500 was down 22% and MSCI Emerging Markets was only down 6%. In 2007 the S&P 500 was up 5.5% and MSCI EAFE was up twice that. We don’t mean to suggest that foreign stocks always outperform domestic stocks or even that there is no correlation between the various components of the global markets, but simply that different factors influence various companies around the world as well as their stock prices and to ignore this maxim is a disservice to the long term investor.

To read more, download the entire Market Commentary.