Markets in recent years have shown a tendency to change direction or shift leadership around the start of the New Year.
That was the case a year ago as interest rates peaked on 12/31/13, with the 10-year treasury hitting 3.1% after rising throughout 2013. It has fallen ever since to 2.2% today. Two years ago, it was emerging market performance that turned with the calendar, as strong results in 2012 gave way to poor performance in 2013. These are two of several recent examples.
One can speculate about the reasons for this calendar-driven phenomenon. Perhaps short-term investors such as hedge funds, driven by calendar-year performance considerations, seek to identify a trend early in the year and ride it out until the performance clock is up at year-end.
We cannot say for sure. Whatever the reason, we might expect more leadership changes to coincide with New Year 2015. Accordingly, we caution investors against chasing the winners or writing off the losing market sectors from 2014.
Instead, investors should look beyond day-to-day market noise, expect the unexpected, and maintain broad diversification across asset classes and sectors. Special focus should be given to investments with attractive valuation. Within equity markets, that means maintaining ample exposure to overseas markets that have trailed in recent years, but offer attractive valuation and long-term return potential.