Mark and his wife Nancy just booked a family trip to Germany for this spring.  If they had taken the trip two years ago, it would have cost them 30% more as one Euro cost $1.40 then and only costs $1.06 now.  So, although we are obviously not travel consultants, for those looking to travel overseas, Europe is certainly a more attractive destination now than what it has been in the past.

Another means to compare the cost of purchased goods in one country versus another is an index called the Big Mac Index, developed by The Economist magazine (http://www.economist.com/content/big-mac-index).  The Big Mac index looks at the relative cost of a Big Mac in countries around the world.  Only a handful of currencies are presently more expensive than the US dollar.  When visiting this link, you can hover over a country and see the value of its currency over time.  For example, a Big Mac in the Euro area cost 50% more than in the United States during 2007 – now it is 10% cheaper.  One could eat like a king in Russia or the Ukraine as their currencies have taken it on the chin this past year.

What does this mean for portfolios?

For portfolio’s, given the high value of the dollar and the recent run-up in US large cap stocks in particular, US stock prices are now both relatively and absolutely more expensive than several other segments of a well-diversified portfolio.  Using just one metric to illustrate this point (although we could point to several), the P/E of the median stock on the NYSE is the highest it has been in 65 years.  So, for our clients’ portfolios, we are increasing our international exposure, in particular in emerging markets and in the small and micro-cap segment here in the US.  International companies are not only cheaper than US large companies, but foreign companies have become much more competitive because of the rising dollar.  The high dollar value is having a negative impact on US large company earnings as they have become much less competitive with European goods sold in Euros.

Sincerely,

Your THOR Team

THOR Investment Management, Inc. is a registered Investment Adviser with its principal place of business in the State of Ohio.  The commentary contained in this market update is limited to the dissemination of general information pertaining to THOR’s wealth management services.