568 / 708
6
•
Fund Family Shareholder Association
www.adviseronline.com(Yes, the 20-day graph is absolutely
ridiculous, but I think it proves the
point.)
As a Vanguard investor, you might
be thinking, “Well, what really mat-
ters to me is whether there’s correla-
tion between the markets and
Energy
.”
Remember, Energy is a fund of stocks,
so one would think that if oil was cor-
related with stocks, then oil stocks in
particular (or stocks in the broad energy
basket) would be even more highly cor-
related with the stock market. Let me
assure you that while the average cor-
relation between the market and Energy
is higher than the the market’s correla-
tion with oil, it’s still all over the map.
I took a look at all rolling 12-month
periods since Energy’s inception in
1984 and compared its monthly per-
formance to
500 Index
. The top right
chart tells the tale, but suffice to say that
correlation ran from -1% to 97% with
an average of 59%. That’s hardly a high
level of correlation, and as the chart
shows, the range of outcomes over more
than 30 years has been massive.
Correlation vs. Magnitude
Even when stock prices and oil are
moving in sync, or appear to be, the
moves in oil have been massively dif-
ferent than the moves in stocks. On
average the absolute change in oil’s
price, since the beginning of the year,
has been 3.6% per day, while stocks
have moved an average of 1.1% per
day. Oil has dropped as much as 6.7%
in one day, and risen as much as 10.0%.
The largest drops and gains for the
S&P, on the other hand, were -2.5% and
2.5%. When I looked back to the start
of oil’s descent from $100 per barrel in
2014, oil’s daily moves dwarfed those
of stocks.
The bottom line is that the current
infatuation with some kind of new cor-
relation between oil and stocks may
make for great headlines, but based on
any read of the data, the higher correla-
tions we’ve seen of late aren’t unusual
and are destined to disappear as a blip
in the historical record.
n
Daily PriceMoves YTD 2016
1/4/16
1/11/16
1/18/16
1/25/16
2/1/16
2/8/16
2/15/16
2/22/16
2/29/16
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
BrentOil
S&P500 index
Daily PriceMoves
Since Aug. 2014
8/14
10/14
12/14
2/15
4/15
6/15
8/15
10/15
12/15
2/16
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
BrentOil
S&P500 index
nice gains for us—outperforming
Total
Stock Market
over just about any time
period you’d care to consider.
But there’s no denying it: The health
care sector has had a tough start to the
year.
Health Care ETF
lost 9.3% in
January and another 0.5% in February,
while the active fund lost 8.9% in
January and 2.0% this past month.
Scrutiny over drug pricing has weighed
on the sector. And with an election
approaching, the specter of health care
reform is creating tons of uncertainty.
The sector’s woes have been a contrib-
uting factor to the lagging returns of my
Model Portfolios
during the first two
months of the year.
And it isn’t just Health Care’s fault.
You and I are also picking up exposure
to health care stocks through funds
run by the PRIMECAP Management
team, which allocates heavily to the
sector. For instance, a third of
Capital
Opportunity
’s portfolio is invested in
the health care business. If you tally up
our total health care exposure, nearly
HEALTH CARE
A Cold, Not Life-Threatening
>
Rolling 20-Day Correlation
(S&P 500, Brent Crude)
2/89
2/92
2/95
2/98
2/01
2/04
2/07
2/10
2/13
2/16
-100%
-80%
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
12-Month Energy/
500 Index Correlation
1/86
1/88
1/90
1/92
1/94
1/96
1/98
1/00
1/02
1/04
1/06
1/08
1/10
1/12
1/14
1/16
-20%
0%
20%
40%
60%
80%
100%
HEALTH CARE
has been a major
holding of mine for years. In fact,
except for a bit more than two years
during the early 1990s, Health Care
has been a component in one or more
of my
Model Portfolios
since their
1991 inception. In fact, I should never,
ever have sold a share, but the gains
have been so strong for so long, I’ve
recommended trimming our position
many times. I hope you’ve followed my
advice to own the fund, though, because
Health Care
has generated some very