May Is In The Record Books, Let's Look At The Numbers

by: Erik Conley

I review the 1-mo, 1-yr, and drawdowns for global asset classes.

There are some surprises.

Asset class rotators will love this article.

Portfolio tilters will love this article.

Thematic investors will love this article.

May is now in the record books. The broad stock market gained 2.8% and was the winner of the global asset class performance sweepstakes.

That isn't much of a surprise, but there are other asset classes that did surprise, to the upside and the downside. This is a story of shifting tides, told in three charts.

Chart 1. Returns for the month of May 2018.

Best in global asset class this month goes to U.S. Equities, as represented by VTI - the Vanguard Total Stock Market ETF.

Here's a surprise, at least to me. #2 on the leader board for May is Commodities. What? I thought commodities were a lost cause. This performance makes me revisit the asset class to find out if something sustainable might be going on.

I'll skip the asset classes in the middle of the pack and go directly to the biggest loser - Non-US Bonds. Can you say Italy?

Following closely behind the losers column is Emerging Markets. Surprise! The darlings of the last couple of years had a stumble in May. Is Italy an emerging market? I don't think so. There must be something else going on there.

Now let's move on to the 1-yr performance report.

Chart 2. Returns for the last 12 months.

Coming in at #1 is crude oil. By now everybody should have taken notice of the strong rebound in oil, so this is no surprise.

#2 is U.S. Stocks, again no surprise.

But look what we have here for the #3 performer over the last 12 months... Commodities! Holy Moly, May wasn't just an anomaly after all. This resurgence in commodities has been going on for a full year now. Time to investigate?

I'll skip the middle of the pack once again and turn to the biggest loser - U.S. Junk Bonds. In my view, this isn't much of a surprise, given the ratcheting up of interest rates we've been seeing lately. It's natural to see money coming out of Junk bonds and going into higher rated credits.

The same is true of U.S. bonds. Rising rates mean falling prices. No surprise.

Lastly we come to the drawdowns for each of these asset classes. As a reminder, a drawdown is the percent decline in price from the last all-time high price.

Chart 3. Drawdowns

The most interesting asset class on this chart is Crude Oil. Even though it has been on fire lately, it's still under water by 70% from its glory days. What does this tell you? It tells me that maybe oil has further to go on the upside.

The next biggest drawdown is our old friend Commodities. They have been doing so well over the past year, but they clearly have a long way to go to get whole again. My takeaway from this is that commodities deserve another look, because there just might be more upside there.

The last drawdown I'll discuss is Gold. Now, I know that you gold bugs are sensitive about anyone saying negative things about your beloved asset. But let's face it - gold has been in a funk since what, 2011? It's had some nice rallies along the way, and being down 29% from the old high price isn't so bad, is it?

What I like about gold is it's role as a safe-haven during times of crisis. And we sure have plenty of things that could go horribly wrong right now, any of which could lift the price of gold.

Final thoughts

How you allocate your money across asset classes is a big deal. Some would say that asset class allocation is 90% of portfolio returns. I'm not sure I agree with that, but I do know it's an important part of investing.

If I got you thinking about the shifting tides of asset classes over various time frames, then this article was successful. Thanks for taking the time to read it.

Disclosure: I am/we are long vti, bnd, djp, vea. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.