2013 stock markets started like 2012 stock markets - with a bang. U.S. stock markets kicked off 2013 with a very good 10.7% return. Also like 2012's first quarter, foreign markets didn't fare as well, earning only 3.5% in the quarter. If we merely hold onto these gains for the remainder of the year we'll do fine.
In the following I examine the details of what has been working in global stocks, providing quick insights into market segments that have succeeded and failed.
U.S. Stocks
Smaller value stocks led the way in the quarter, earning more than 13%. By contrast, large core companies earned only 7.5% and large value earned 9.5%. Other than these extremes, style returns clustered around 12%. This has been one of those unusual periods where the "stuff in the middle" (core) has not performed in line with the "stuff on the ends." I use
Surz Style Pure® classification throughout this commentary.
On the sector front, health care and consumer staple stocks fared best, earning 15% and 14% respectively. By contrast, materials earned only 1%, and infotech gained only 6%.
But the interesting details lie in the cross-sections of styles with sectors, as shown in the following heat map. A heat map shows shades of green for "good," which in this case is good performance relative to the total market. By contrast, shades of red are bad, indicating underperformance. Yellow is neutral. In the table below, we see that the best performing market segment was comprised of mid-cap core companies in the consumer staples sector, earning 24.1%. And the worst performing segment was small cap core in the utilities sector, losing 11.4%. Many quantitative managers employ momentum in their models, buying the "green" and selling the "red." Fundamental managers use heat maps as clues to segments of the market that are worth exploring, for both momentum and reversal potential.
Foreign Stocks Looking outside the US, foreign markets earned 3.5%, lagging both the U.S. stock market's 10.7% return and EAFE's 5.3% return. Japan was the big story, earning 12.8% in $U.S. The return in Japanese yen was an even more impressive 23%. The Japanese stock market soared in the quarter as the yen was weakening against the dollar. By contrast, emerging markets suffered a setback, losing 2%.
On the style front, core surprised, as it did in the U.S., but core led rather than lagged. Like the U.S., further insights into market behavior are provided by heat maps, as shown in the following. As you can see, Japan was "green" in almost all styles and sectors, and emerging markets and the materials sector were both mostly red -- underperming.
How to Use This Information
We all have outlooks on the economy and the stock market, and adjust our thinking as results roll in. I personally remain surprised and grateful that stocks have performed so well recently. In my
end of year commentary, I pointed out Japan as a bargain play, and the movement of assets into emerging markets. As 2013 has unfolded so far, bargain hunting has won, and asset flow has lost. You can use the information above to test your personal outlooks, to see which are unfolding as you think they should and which are not, with the intention to clear the haze from those crystal balls.
And now a word on target date funds: Department of Labor Guidance Creates Opportunities in Target Date Funds
After four long years of anxiously awaiting, the Department of Labor has finally released must-read guidance on the selection and monitoring of target date funds. These new rules clarify several safe harbor provisions, as well as provide various opportunities for proactive investment advisors.
The new DoL rules can be a threat or an opportunity. Advisors can ignore them, or embrace them. If you don't capitalize on these openings, someone else will. TDFs have grown from nothing to $1 Trillion in seven short years, and are forecast to grow another $3 Trillion, to $4 Trillion, by 2020.
To learn how you can profit from the DoL guidance, see OPPORTUNITIES and Fiduciary Guide.
