Monday, April 15, 2013

The Commodity Cycle Continues to Unwind

As I wrote in an earlier post, the S&P500 hit a record high... but it was brief!  After today's drop, the value is back under the level that would break the monthly close record high.  Of course if you want to be an investor, the key is to ignore short-term moves and focus on long term themes.

One thing I've been writing about for a while is that the emerging market and commodity cycle themes of the last decade are likely to unwind.  Today's moves continued a trend that has been happening for several years now where these areas of the market are hit more heavily than the S&P 500.

  Now 1 Year Ago 2 Years Ago 5 Years Ago
SPY 1.000 0.882 0.843 0.800
XLE 0.482 0.451 0.501 0.488
EWC 0.171 0.179 0.208 0.192
EEM 0.263 0.267 0.310 0.290

The table here shows the dividend-adjusted levels of various ETFs, all relative to the value of the S&P500 today.  You can see that the S&P has given a 25% return in the last 5 years (remember, including dividends).  In contrast, XLE (energy sector of the S&P 500) has been slightly down, EWC (Canadian index in US$) and EEM (Emerging Markets in US$) have both dropped significantly... again after dividends!  While single day numbers are pretty useless, today's drop was also consistent with this:  -4% for XLE and EWC versus -2.3% for the S&P500.

To me this is showing that these areas are significantly under-performing.  Is it a buying opportunity?  If you look at other posts I've made about longer term values for these ratios (link for Canadian equitieslink for energy sector), you'll see that there's still plenty of room for these ratios to "revert to the mean".

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