For U.S. investors, foreign currency fluctuations can be a critically important – but much overlooked — factor to consider when investing in international stock or bond fund. If a foreign currency is appreciating relative to the U.S. dollar, it can provide a boost to returns, but if the currency is weakening, it can detract from them.
One of the hot investment phrases streaming through the investment media lately is “currency wars.” This refers to the idea that governments around the globe are fostering weak currency policies in order to export their way to prosperity at a time when world aggregate demand is weak. Japan is the latest country to weaken its currency, as new leadership has recently diluted the value of the Yen materially in an attempt to jumpstart their way out of deflation. So with all these countries racing their currencies to the bottom, shouldn’t gold be the store of value that we can all depend on? One look at the chart below tells you that gold has not received the memo.
How to determine the proper time horizon to evaluate portfolio performance is always a subject for an interesting conversation. In a recent client survey on investment issues, we asked our clients “What time horizon do you feel is the best time frame to evaluate portfolio returns?” The results varied: 16% said “Monthly,” 43% said “Quarterly,” 37% said “Annually,” and 4% said “Over a complete market cycle.” (As an investment professional, I would have selected the last option.)
Every now and then I scan various Exchange Traded Fund (ETF) options to find out what is working to determine if new trends are emerging. During this scanning process I recently came across a very interesting industry that looked quite promising to me. It has been wise for investment professionals to ignore this industry over the past six years, but this year could be different. Fair warning: Before I proceed, you need to leave your opinion at the door.
Just two days ago the 4th quarter GDP came out as a negative number, which was much worse than expected. In fact, not one of 83 analysts had anticipated a negative number, meaning they were all too bullish on the 4th quarter growth number. But yesterday the Chicago Purchasing manager’s index, a growth barometer, was way above expectations for growth, and not one of 48 analyst estimates was in the ballpark, meaning they were all too bearish on growth.
In my last column, I described a bearish scenario where the markets come to the realization that the monetary authorities are out of bullets. This was simply an exercise in critical thinking and doesn’t actually line up with our current forecast, and I did promise I would come back with a bullish scenario.
Most Pinnacle Advisory Group clients are familiar with our view of secular (or very long-term) market cycles. My partner, Michael Kitces, and I first published a paper on secular bear markets in the Journal of Financial Planning in 2006, where we predicted correctly that stock prices were likely to deliver much less than average returns for years to come. In my 2009 book, Buy and Hold is Dead (AGAIN): The Case for Active Portfolio Management in Dangerous Markets, I reviewed in some detail the rationale for why stock prices can disappoint investors ‘on average’ for decades. (In fact, the “(AGAIN)” in the book title referred to the fact that we’re currently laboring through the fourth secular bear market since the 1900’s.)
One of my favorite scenes in the Pixar movie Finding Nemo comes at the end. The fish had managed to outwit the Dentist (who was holding them captive in a tank) by dirtying the water enough to force a water change. In order to do that, the Dentist had to bag the fish and leave them outside the tank, at which point they jumped out the window and into the harbor below. Unfortunately, they hadn’t considered how they were going to get out of the plastic bags. The movie ends with one of the fish asking, “Now what?”
Few people bothered to see Trouble with the Curve, a recent baseball movie starring Clint Eastwood and Amy Adams, and most critics didn’t like it. I did see the movie, and without giving away the plot, it is fair to say that the film is a cry against quantitative analysis in sports. Eastwood plays an aging baseball scout with failing eyesight who has to rely on his daughter (Amy Adams) to evaluate the home office’s number one prospect. In the end, all of the number crunching in the world can’t come up with a better analysis than Eastwood, who can hear the sound of the bat on the ball and subsequently knows better than to sign the prospect. It was impossible to watch this movie without thinking of last year’s hit film Moneyball.
The Federal Reserve spoke yesterday, and not surprisingly decided to buy more treasury bonds to keep expanding the balance sheet. It might have been a bit surprising that they have now also explicitly targeted an improvement in the unemployment rate (6.5%) and stated a tolerable inflation band (2.5%) for investors to use as guides for when the Fed might engage in policy withdrawal. The market went up for a few hours, and then drifted back to earth and closed unchanged on the day; Fed decisions can’t force politicians to trade in political theatre and come up with a deal before the 11th hour.