Why You’re Not Making Money in the Stock Market

With Europe’s Eurofirst 300 Index down close to 20%, and the MSCI Emerging Markets Index down 9.5% so far this year, you’d have to search far and wide to find a stock market on Planet Earth where investors have made money this year. As a U.S.-dollar investor, only your savvy and uncannily well-timed investments in the unlikely combination of Indonesia, Malaysia, Thailand, Colombia, Pakistan and Chile would have made you money this year. Thanks to the exploding number of exchange-traded funds (ETFs) in recent years, you actually could have invested in each of these markets. But I’d hazard it’s a rare fund manager who bet on this strange admixture of second- and third-tier global markets when the clock struck midnight on New Year’s Eve 2010.

Perhaps surprisingly, some of the world’s top hedge funds are finding the current environment even more challenging than the fall of 2008. Louis Bacon’s Moore Capital Management recorded its worst month in its 20-year-plus history in May. Only those funds that suffered mightily during last year’s bull run — likePeter Theil’s long-suffering Clarium Capital — benefited from a modicum of comeuppance during an otherwise devastating May.

Currency Movements: The Wrench in the Works

Currency effects have been particularly nefarious for U.S.-dollar investors in 2010. More often than not, the declining U.S. dollar has acted as a tailwind to returns in global stocks. This year, it’s been the opposite. With the U.S. dollar soaring — even a (barely) positive local return in a global export powerhouse like Germany — has translated to a loss of about 15% for U.S investors. And, if you failed to cut your losses in Greece or Spain, your investments have almost halved in U.S.-dollar terms.

U.S. Dollar Versus the Euro

Nor were the strong dollar’s negative effects limited solely to Europe’s economic ne’er-do-wells. Virtually every one of the currencies of the BRIC countries — Brazil, Russia, India and China — have tumbled against the Greenback in 2010.

Global Markets over the Last 12 Months… Not So Hot, Actually

You’re probably feeling lousy about the state of your portfolio… especially after everyone else racked up those huge gains in the S&P 500 last year. As recently as early May, the media was still widely quoting the 70%-plus gains of the S&P 500 during the past 14 months.

A scant few weeks later, the picture could hardly look more different. Just look at the 12-month chart of the S&P 500 below. It turns out the S&P 500 is now up a mere 15% over the last 12 months — a far cry from the widely quoted figure of 70%. For all of their better prospects, emerging markets have scarcely fared better.

S&P 500 versus Emerging Markets

Frankly, when I first pulled up this chart, it left me scratching my head. But over the last few months, the strong gains between March and May of 2009 during last year’s market bounce have dropped out of the 12-month data set. The take-away? Even the relatively strong U.S. market has made precious little headway since last summer.

But more than anything else, the choppiness of global stock markets has been the most gut wrenching. Just look at how the MSCI Emerging Markets Index performed over the last six months. Unless you’re a 100% buy-and-hold investor, you’ve been whipsawed in and out of markets during the sharp pullbacks at the end of January and April — all the while lulled into a false sense of security by a two-month stretch of record-low volatility. And even if you’ve had the enviable psychological stamina to stay fully invested, you haven’t made any money. It’d be hard to design a more frustrating and outright nefarious market if you tried.

Emerging Market Stocks over the Past Six Months

Thanks to the crisis in Europe, global developed markets have fared even worse — though at least there, thanks largely to a collapse of the euro, the downward trend is solidly in place.

MSCI EAFE Index over the Past Six Months

Markets on a Knife’s Edge

The game of financial prognostication is all about divining the future — whether you choose to use astrology, the entrails of sheep, Elliot Waves, Modern Portfolio Theory or any other similarly irrelevant psychological crutch. Here opinion, as always, is divided. Technical experts like John Bollinger have declared — with almost reluctant boldness — that for the U.S. stock market, “things could hardly be more bullish.” Other pundits ranging from George Soros to perma-bear Nouriel Roubini argue that we are in the eye of the financial hurricane, and that the worst is yet to come. Meanwhile, gold buffs happily point out that the yellow metal now is outperforming the S&P 500 over the past 12 months — just like they knew it would all along.

Of course, making predictions is a tougher game than actually making money from them. It’s the difference between standing in the batter’s box, and trying to hit a curve ball, as opposed to just commentating on events from behind home-plate.

The lesson? If you know of a money manager who has made money consistently in markets over the last 18 months, shoot her and stuff her.

She is a rare bird, indeed…

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