Dollar and bonds improve as energy plummets
For most of the early part of this year, I emphasized that there were not many market sectors that were advancing. While that remains true, two of the year’s early leaders have reversed course. We are all undoubtedly aware that oil prices have been falling, because the media gives a report on energy costs several times a day. There have also been price declines at the gasoline pumps–more in some states than in others. (Here in Utah we currently have the highest gas prices in the continental U.S.)
The decline in the energy sector has been disastrous for energy investors. The chart below gives a good image of how severe the downturn is. The black line is United States Natural Gas ETF (UNG). This fund was the top performer for much of the year. But since turning down in July, the price has dropped so far and fast that this fund is now down about 10% from the start of 2008.
The blue line is United States Oil ETF (USO). It has also fallen on hard times after being a profit leader for much of the year. While it is still up more than 10% since the start of 2008, that is a significant decline from the more than 50% gain it enjoyed at its peak in July. Six months of gains vanished in only six weeks!
The gold line is the S&P 500 and was included just for comparison.
Just about the same time the energy sector started its plunge, a couple of other sectors were starting to improve. During bear markets, bonds have traditionally been an alternative for many investors. Buying bond funds is different than buying the actual bonds. Bond funds fluctuate in value as the demand for bond yields ebbs and flows. The black line on the chart below is iShares Lehman 20+ Year Treasury Bond Fund (TLT). For the past four weeks, this fund has made a nice upward move. You can see that this fund has shown significant volatility this year and it is probably still too early to take a position in this fund, but at least the bond sector is showing some strength again.
The gold line on the chart is PowerShares DB US Dollar Index Bullish Fund (UUP). After languishing for most of the year, it has had a nice upward slope since mid-July. At Strategis Financial Group we have take limited positions in this fund in some of our strategies.
In spite of the improvement in these two sectors, overall the financial markets remain very weak and the current risk far outweighs the potential rewards. The advice we have been giving for several weeks remains: the best place to be right now is on the sidelines waiting for an improvement in economic fundamentals.
Staying out of the markets can be challenging. Many investors seem to feel a need to jump back into the market whenever there is an upturn. But risk at this level remains a very real concern as demonstrated by days like today. Even though the major indices have suffered significant losses so far this year they can still experience more declines.
Investor patience will eventually be rewarded. Avoiding a 15% loss us just as profitable as capturing a 15% gain.
F.S.
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