Some of last years worst performing fund categories are the best performers this year. Surprised? You shouldn’t be. It happens often. It’s not always consistent across every asset class or sector. But when you beat something down far enough, eventually it has no place to go but up.
It happened with solar in 2013. This year-long term government bonds, muni bonds, REITs, utilities, and gold are outperforming the S&P 500.
Should you pour money into these categories because each performed well? Chasing is a bad strategy. Maybe it’s time to spring clean your portfolio, not rearrange it.
Oh, The Weather
Yes, weather affects the economy, company profits, and how you spend money. Don’t believe me? How many of you had higher gas bills this year because of the Polar Vortex? I did. Anyone’s utility company send a letter warning prices would rise? Same here. Natural gas prices are up 20% since January.
And don’t forget the snow. Salt and sand was a hot commodity this year. So hot, people were stealing it. Municipal budgets were hit hardest by one of the worst winters in decades. That’s money that can’t be put to use somewhere else.
We won’t see the full effect of this eternal winter for several months.
Stock buybacks played a big role in performance over the last five years. Since the crash, we’ve seen earnings growth due to cost cutting and buybacks. It’s artificial earnings growth.This year, the amount of buybacks have leveled off, along with it the market.
Companies need to cross the line from artificial to organic earnings and revenue growth. Profit margins tend to back this up. Until companies spend money on hiring and equipment, growth will continue to be slow.
The Fed even likes the idea of hiring people. Lower unemployment is the goal under Yellen. Don’t expect the Fed to change rates anytime soon.
The big January drop wasn’t a coincidence. The Ukraine standoff was the catalyst that led to a selloff in U.S., European, and emerging markets. When political risk rises, money looks for safety. Things like bonds, utilities, REITs, and gold come to mind. Sound familiar? All assets that have performed well this year.
Emerging market funds where hit hardest by the January selloff. Anyone caught up in the fear mongering, probably sold near the bottom. This already undervalued sector got cheaper. My thoughts at the time still stand.
But once things cooled down in Ukraine, the headlines stopped and funds bounced back. I have no idea where EM goes over the next few months, but the long-term opportunity remains.
Why We Diversify
It’s easy to see why people still put money into U.S. stocks. The S&P 500 was up 30% last year! Big returns draw crowds, cause performance envy. But it’s just a stat of the past. This is why we stay diversified, stick to the plan, and avoid chasing returns. When U.S. stocks aren’t hot, other areas pick up the slack.
After consecutive years of 26%, 15%, 2%, 16% and 32% returns including dividends, did you expect another big year?
That’s like running a marathon at sprint speeds with a short breather in the middle. You can only run so far, so fast before needing a break or collapsing from exhaustion.
For now, the market is tired, taking a breather until it regains some energy. The longer the market stays flat, the less likely it collapses, crashes, or corrects. Sideways is a good thing. Not great like 2013, but better than down. We all need a breather sometimes.