(PUB) Investing 2016

(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 > 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

12-Month Energy/ 500 Index Correlation

Rolling 20-Day Correlation (S&P 500, Brent Crude)

-100% -80% -60% -40% -20% 0% 20% 40% 60% 80% 100%

100%

80%

60%

40%

20%

0%

-20%

2/89

2/92

2/95

2/98

2/01

2/04

2/07

2/10

2/13

2/16

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

Daily PriceMoves Since Aug. 2014

Daily PriceMoves YTD 2016

-10% -8% -6% -4% -2% 0% 2% 4% 6% 8% 10%

BrentOil S&P500 index

10% 12%

BrentOil S&P500 index

0% 2% 4% 6% 8%

-10% -8% -6% -4% -2%

1/4/16

2/1/16

2/8/16

8/14

2/15

4/15

6/15

8/15

2/16

1/11/16

1/18/16

1/25/16

2/15/16

2/22/16

2/29/16

10/14

12/14

10/15

12/15

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

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.

HEALTH CARE A Cold, Not Life-Threatening

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

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