Why Have Globally Diversified Portfolios Been on Trial?
If you’ve looked at your 401(k) statement lately you may be wondering if the world markets are collapsing. I believe I’m safe to say you’d be wrong. As we look back over the past year, if it taught investors anything, it’s that markets continue to be unpredictable. CNBC recently reported that 2015 was the most challenging year since 1937 to make money —in fact they reported that nearly 70 percent of investors lost money in 2015. The S&P 500 and Dow Jones industrial average both had their worst year since 2008. But keep in mind this is after record growth over the previous six years.
As a strong advocate for the profound benefits of global diversification, I must admit that it feels like diversified portfolios have been on trial over the past two years. Performance has not been terrible but it has also not been anything to write home about. Although it’s easy to prognosticate that this will continue far into the future, I believe it is highly unlikely. It can be daunting to experience market downturns however knowledge is power and my intention is to help make some sense as to the factors that have impacted 2015 and already lead to a menacing start to 2016. There is a yin and yang or a positive and negative to these moving economic parts. They are not completely black or white, just as things in life are not completely black or white. Let’s take a look.
The U.S. Dollar (USD) was very strong for the second consecutive year—up 20 percent since July of 2014. Although this leads to an advantageous exchange rate with inexpensive experiences when you ski Whistler in Canada or vacation in the south of France, it has not been advantageous for our retirement accounts and here’s why: Owning foreign denominated securities and mutual funds had their returns trimmed by 7.5 percent when converted back into U.S. Dollars. This meant that international diversification was a negative for both stocks and bonds. As an example, if an International holding experienced a -2 percent loss for the year, by the time it was converted back into U.S. dollars it actually experienced a -9.5 percent loss. The strong USD is great for vacations—not so good for your investment accounts.
Oil prices plunged for the second year in a row, as did many other commodities. In 2014 a barrel of crude was selling for $107. Last week it fell below $28 a barrel. Members of the oil cartel OPEC haven’t agreed on production levels and Saudi Arabia refuses to ease up on pumping oil. Many analysts point to the outpacing of supply compared to demand. Yes, consumers are using more oil than in previous years however the supply is far outpacing the increased demand. This brings great joy when you fill up your SUV and RV at the pumps yet it has had a damaging effect on any stocks associated or affiliated to the energy sector. This is a major reason for the poor performance of U.S. Large Cap Value last year. The low cost of oil is great for filling up your gas tanks—not so good for your investment accounts.
China has been one of the most volatile stock markets in 2015 and is amid fears of a slowing economy. China’s decline has had a ripple effect across the globe and has been worsened by reduced growth rates for economies of all sizes. Interestingly when we take a look at the breakdown of the MSCI All Country Index, the US makes up over 50 percent of the world market and China only 2.86 percent. You may question why their economy is having an impact on your portfolio given the relatively small allocation the country has in the global stock market. Their economy is one of the largest in the world. In fact, they are the world’s largest trading partners. Due to the large portion of their economy devoted to manufacturing, they are also one of the largest consumers of natural resources. Therefore when China’s economy slows, there may be a much larger trickle-down impact on the rest of the world. For example, they make up 20 percent of the world’s population but use 60 percent of the world’s concrete, 54 percent of the aluminum, 50 percent of the Nickel and 49 percent of the coal.
And if the USD, Oil prices and China was not enough, the Central Bank actions and communications created uncertainty for investors which added to financial market volatility. The major impact of Central Bank uncertainty was on the bond market. The Fed spokespersons expended a lot of energy talking about raising rates and yet most of their meetings passed without increases causing market volatility to rise and fall—so investors were relieved when the Fed finally announced an interest rate increase in December. It appears the Fed is very slowly embarking on a new phase of monetary tightening.
We have entered 2016 without great enthusiasm for global economic growth however the two largest economies, America and China, will probably rank fairly high in terms of GDP, but neither one shows signs of acceleration. In my opinion I do not see a recession on the horizon, as the economic imbalances that would typically lead to a recession are not in place. This market correction does not resemble 2008 in any way. The labor market is nearly back to normal, but is not overheating, consumer spending is solid, household balance sheets are much healthier than in the past, housing is doing well and business investment is growing slowly.
To help put the markets in perspective, on March 6, 2009, the Dow hit a market low of 6,443. Who would have ever thought that just seven short years later the Dow would have increased by more than 10,000 points? While we cannot rely on past performance to predict the future, to date, there has never been a down stock or real estate market that has not rebound to hit an all time high. It is important to keep in mind that rather than time the markets it’s all about time in the markets.
David Rosell is president of Rosell Wealth Management in Bend. www.RosellWealthManagement.com. He is the author of Failure is Not an Option-Creating Certainty in the Uncertainty of Retirement. You may learn more about his book at www.DavidRosell.com or Amazon.com. Ask for Rosell’s book at Barnes & Noble, Newport Market, Cafe Sintra, Bluebird Coffee Shop, Dudley’s Bookshop and Powell’s Books in Portland.
