Stock market volatility has returned to a higher level this year and the market has delivered negligible gains through February 9.
Much of that fall, in my opinion, is due to the stronger US dollar and a panic selloff in oil and energy stocks.
While large U.S. companies, dependent on exports, have suffered declining revenues and earnings, their European counterparts are doing well.
Much of this divergence is directly attributable to currency exchange rates. A stronger dollar makes our goods more expensive to the rest of the world. A weaker euro is lowering prices for European exports.
So while Daimler (DDAIF) and BMW are enjoying record sales worldwide, Ford (F) and General Motors (GM) are struggling overseas.
While a strong dollar lowers the price of oil and other commodities, it also works to lower demand for our manufactured products and eventually squeeze revenues and profit margins for US companies.
We believe that for the foreseeable future these currency trends will continue to hinder US markets while boosting the Euro bloc.
That is the reason I decided to add the Wisdom Tree Europe Hedged Equity ETF (HEDJ) to the Macro Plus Income portfolio.
Comparing year-to-date performance of the S&P 500 to the Euro Stoxx 600 index demonstrates the difference in market reactions to the current state of economic affairs.
While the US market is still down for the year, the broad European index is up approximately 8% as of early February.
US exporters like Procter & Gamble (PG), talk about suffering some of the toughest times in the history of its company. Mercedes Benz (DDAIF) reported another record quarter.
In my opinion, the Wisdom Tree Europe Hedged Equity ETF is a sophisticated way to cash in on the export advantage of large European companies.
It is composed of European-based companies which generate one half or more of their revenues from sales outside of Europe and pay a sustainable dividend.
More importantly, the currency effect is hedged out of the investment results. That hedge is necessary. Without it we could not take advantage of the continuing QE fueled rally in European stocks.
Because of that hedge the return on the Wisdom Tree ETF is keeping pace with the STOXX and is up roughly 9% this year as of February 9.
DISCLAIMER: The investments discussed are held in client accounts as of January 31, 2014. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable. Past performance is no guarantee of future results.
We are a registered investment adviser firm based in Texas. CJ Brott founded our firm in 1984. Since 1980 he has been lecturing regularly on financial topics at Southern Methodist University. He is a sought-after public speaker and has been interviewed by various national and local financial publications. We benefit from CJ’s many industry contacts when making investment decisions.