By Christian Magoon
CEO, Magoon Capital
Now that QE3 is officially been announced many investors are reevaluating their asset allocation to best position their portfolios for a more liquid financial landscape. Many are reviewing the last week's worth of market reaction to judge the winners and losers of QE3. The truth is that over the last month, however, the markets have been anticipating the European Central Bank's liquidity boost as well as the Federal Reserve's new efforts. Quietly a variety of winners have emerged during this last month in various market segments. Thus, in the spirit of QE3 let's review three broad markets to understand what specific areas have performed and underperformed.
Of course increased financial liquidity means that hard assets like precious metals will benefit due to their scarcity and inherent value. This popular way to play QE3 actually produces an interesting chart over the last month which shows the most well known precious metal to be the worst performer. Yes, gold has been handily outperformed over the last month by platinum and silver. Even though gold is still the world's preferred precious metal, it has fallen by the wayside lately. Here's a chart comparing the three major physical precious metals ETFs over the last month: the SPDR Gold Trust (GLD) , the iShares Silver Trust (SLV) and the ETF Securities Physical Platinum Fund (PPLT). This chart was composed via the NASDAQ's interactive chart center.
While the general public watches the S&P 500 as a gauge of market strength or weakness, investors have been reviewing stocks besides large caps. Taking a look at the market in four slices reveals fairly predictable performance over the last month across large, mid, small and micro cap stocks. Perhaps the only major surprise is the size of the performance gap between the S&P 500 ETF (IVV) and the other segments. Simply put, large caps haven't joined the party. Here's the NASDAQ one month performance chart showing the iShares S&P Mid Cap Index Fund (IJH), the iShares S&P Small Cap Index Fund (IJR) and the iShares Russell Micro Cap Index Fund (IWC) and the previously mentioned IVV.
Emerging markets are "risk on" assets and benefit from liquidity. However these markets also carry a variety of risks that can overrule a more aggressive global investment climate. Reviewing the benchmark both VWO and EEM track, the MSCI Emerging Markets Index, reveals a month of performance slightly ahead of the S&P 500 ETF (IVV). Perhaps more interesting is which two BRIC (Brazil, Russia, India and China) countries have set themselves apart from the index as outliers. Here's the NASDAQ one month performance chart showing the aforementioned iShares MSCI Emerging Market ETF (EEM), the iShares MSCI Brazil Index Fund (EWZ), the Market Vectors Russia ETF (RSX), the WisdomTree India Earnings Fund (EPI) and the iShares FTSE China 25 Index Fund (FXI).
Reviewing the winners in several market segments over the last month teaches several worthwhile lessons. First market segments have been moving upward for more than just the last week. Investors were anticipating liquidity and investing accordingly. Second the segments that moved the most have been "risk on" plays versus more stable names. This may indicate that there is more to come in this current rally. Finally the data delivers surprises both good and bad. Gold and China are relative losers and Russia and micro cap domestic stocks have been big winners. Who would have thought?
Going forward the continuation of these performance trends will depend on the actual results of the new liquidity programs, not simply the anticipation of them. Investors should closely monitor the effectiveness of these efforts as this will likely dictate market valuations going into the end of 2012 and beyond.