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Weekly Summary of Research Findings: 5/18/15 – 5/22/15

Below is a weekly summary of our research findings for 5/18/15 through 5/22/15. These summaries give you a quick snapshot of our content the past week so that you can quickly decide what’s relevant to your investing needs.

Subscribers: To receive these weekly digests via email, click here to sign up for our mailing list. Keep Reading

Inflation Forecast Update

The Inflation Forecast now incorporates actual total and core Consumer Price Index (CPI) data for April 2015. The actual total (core) inflation rate for April is about the same as (a little higher than) forecasted.

Tilting or Indexing, Fundamentally?

Are there gradual steps toward a fundamental stock index that work just as well? In their April 2015 draft paper entitled “Decomposing Fundamental Indexation”, Gregg Fisher, Ronnie Shah and Sheridan Titman compare fundamental indexing strategies to strategies that tilt a market index toward high fundamental-to-price stocks. Fundamental indexing strategies weight stocks by firm fundamentals instead of market capitalizations, ignoring any information in stock prices. The tilt strategies adjust market weights with multipliers linearly scaled to fundamental-to-price ratios across a universe of stocks. Reflecting extreme fundamentals ratios for smaller stocks, the range of multipliers for stocks in the upper (lower) half of market capitalizations is 0 to 2 (0 to 4). After applying multipliers, tilt the strategies normalize weights so that they sum to 100%. Rebalancing for all portfolios is annual on the last day in April, incorporating a minimum four-month lag between the end of the financial reporting period and portfolio formation. Using data for a broad sample of U.S. common stocks during May 1975 through December 2014, they find that: Keep Reading

Fund Activeness Predicts Performance?

Are mutual fund managers whose holdings deviate most from their benchmarks the best performers? In their April 2015 paper entitled “Deactivating Active Share”, Andrea Frazzini, Jacques Friedman and Lukasz Pomorski investigate whether Active Share is a reliable indicator of future mutual fund performance. Active Share measures the distance between a portfolio and its benchmark, ranging from zero for a portfolio that is identical to its benchmark to one for a portfolio with no holdings in common with its benchmark. They consider both theoretical arguments and empirical analysis, with the latter focused on disentangling Active Share and benchmark effects. Using holdings and performance data for actively managed U.S. equity mutual funds during 1980 through 2009, they find that: Keep Reading

A Few Notes on Invest with the Fed

In the introduction to their 2015 book entitled Invest with the Fed: Maximizing Portfolio Performance by Following Federal Reserve Policy, authors Robert Johnson, Gerald Jensen and Luis Garcia-Feijoo state: “Our purpose in writing this book is to provide a general overview of the Fed’s role in the financial markets, but, more important, to offer investors a road map that can be used in designing an investment portfolio that takes account of Fed policy. In detailing our road map for investors, we offer a rationale for each investment strategy along with empirical evidence supporting the efficacy of the strategy. Most important, the recommended strategies come with clear explanations and easy-to-follow descriptions of the processes needed to execute the strategies.” The essential Fed policy discriminator they use is whether monetary conditions are expansive (decreasing discount rate and decreasing federal funds rate), restrictive (increasing discount rate and increasing federal funds rate) or indeterminate (one rate increasing and the other decreasing). Based on their research, they conclude that: Keep Reading

Stock Returns Around Memorial Day

Does the Memorial Day holiday signal any unusual return effects? By its definition, this holiday brings with it any effects from three-day weekends and sometimes the turn of the month. Prior to 1971, the U.S. celebrated Memorial Day on May 30. Effective in 1971, Memorial Day became the last Monday in May. To investigate the possibility of short-term effects on stock market returns around Memorial Day, we analyze the historical behavior of the stock market during the three trading days before and the three trading days after the holiday. Using daily closing levels of the S&P 500 Index for 1950 through 2014 (65 observations), we find that: Keep Reading

Continuation and Reversal Months?

Are some calendar months more likely to exhibit stock market continuation or reversal than others? In other words, is absolute (intrinsic) momentum an artifact of some months or all months? To investigate, we relate U.S. stock index returns for each calendar month to those for the preceding 3, 6 and 12 months. Using monthly closes of the S&P 500 Index from December 1949 (using the January 1950 open) through April 2015 and the Russell 2000 index from September 1987 through April 2015, we find that: Keep Reading

Good Currency, Bad Currency?

Can currency carry traders improve performance by excluding “bad” currencies? In the April 2015 version of their paper entitled “Good Carry, Bad Carry”, Geert Bekaert and George Panayotov investigate the differences between good and bad carry trades (long high-yield and short low-yield) constructed from G-10 currencies. They define good (bad) trades as those with relatively high (low) Sharpe ratios and slightly negative or positive (more negative) skewness. Their benchmark portfolio is long (short) the equally weighted five G-10 currencies with the highest (lowest) yields. Their process for dynamically and progressively enhancing the currency carry trade universe is to isolate currencies associated with bad carry trades by each month: (1) experimentally excluding currencies one at a time from the benchmark and dropping the one that most depresses inception-to-date Sharpe ratio (inception December 1984); and, (2) repeating until they have eliminated seven currencies. The number of long positions is equal to the number of short positions in all test portfolios, with positions equally weighted. Monthly performance calculations are net (exploiting availability of bid and ask quotes). Using one-month forward quotes on the last trading day of each month and spot quotes on the last day of the next month for all G-10 currencies during December 1984 through June 2014 (354 months), they find that: Keep Reading

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Editor Archive Picks

Long-run Stock Market Volatility Based on Reasonable Expectations

…rsion in returns. In the May 2009 version of their paper entitled “Are Stocks Really Less Volatile in the Long Run?” Lubos Pastor and Robert Stambaugh challenge this view by focusing on the reasonable expectations of investors dealing with uncertainty rather than data in hindsight. Using annual real (inflation-adjusted) returns and return predictors for the period 1802-2007 (206 years), they conclude that: There are five material comp…

10-Month SMA Timing Signals Over the Long Run

…0-month SMA viewed as bullish/bearish. How has this indicator performed for U.S. equities in aggregate over the long run? To investigate, we employ the long-run data set of Robert Shiller to construct a very long backtest of 10-month SMA crossing signals. This data set includes monthly levels of the S&P Composite Index, calculated as average of daily closes during the month. This method of calculation deviates from that most often used for SM…

A Long Run Demographic Stock Market Outlook

…et returns derives from combining: M/Y to predict mean dividend yield drift. Deviations of consumption from its long run relationship to to dividends and labor income to predict dividend growth. A projection of M/Y indicates a long-run real U.S. stock market return in the range 8%-10% during 2010-2050 (see the chart below). The following chart, taken from the paper, compares M/Y (left scale) and annualized real U.S. stock market returns over the…

Earnings per Share Growth in the Long Run

Can the U.S. stock market continue to deliver its historical return? In the preliminary draft of his paper entitled “A Pragmatist’s Guide to Long-run Equity Returns, Market Valuation, and the CAPE”, John Golob poses two questions: What long-run real return should investors expect from U.S. equities? Do popular metrics reliably indicate when the U.S. equity market is overvalued? He notes that the body of relevant research presents no…

“Sell in May” Over the Long Run

…” (and “Buy in November”, hence also termed the “Halloween Effect”) work over the long run, perhaps due to biological/psychological effects of seasons (such as Seasonal Affective Disorder)? To check, we turn to the long run data set of Robert Shiller. This data set includes monthly levels of the S&P Composite Index, calculated as average of daily closes during the month. This method of calculation deviates from t…

Popular Articles

    Momentum Strategy, Value Strategy and Trading Calendar Updates

    We have updated the the monthly asset class momentum winners and associated performance data at Momentum Strategy. We have updated the Trading Calendar to incorporate data for April 2015.  

    Preliminary Momentum Strategy Strategy Updates

    The home page and “Momentum Strategy” now show preliminary asset class momentum strategy positions for May 2015. Differences in past returns between the fourth place and the top three places are large enough that the top three probably will not change by the close, but their order may change.

    Inflation Forecast Update

    The Inflation Forecast now incorporates actual total and core Consumer Price Index (CPI) data for April 2015. The actual total (core) inflation rate for April is about the same as (a little higher than) forecasted.

    A Few Notes on The 3% Signal

    In the introduction to his 2015 book entitled The 3% Signal: The Investing Technique that Will Change Your Life, author Jason Kelly states: “Ideas count for nothing; opinions are distractions. The only thing that matters is the price of an investment and whether it’s below a level indicating a good time to buy or above a level indicating a More

    A Few Notes on Invest with the Fed

    In the introduction to their 2015 book entitled Invest with the Fed: Maximizing Portfolio Performance by Following Federal Reserve Policy, authors Robert Johnson, Gerald Jensen and Luis Garcia-Feijoo state: “Our purpose in writing this book is to provide a general overview of the Fed’s role in the financial markets, but, more important, to offer investors a road More

    A Few Notes on Irrational Exuberance

    In the preface to the 2015 Third Edition of Irrational Exuberance, author Robert Shiller states: “…evidence of bubbles has accelerated since the [2007-2009 world financial] crisis. Valuations in the stock and bond markets have reached high levels in the United States and some other countries, and valuations in the housing market have been increasing rapidly in many countries. …The More

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Current Momentum Winners

ETF Momentum Signal
for May 2015 (Final)

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Second Place ETF

Third Place ETF

Gross Compound Annual Growth Rates
(Since August 2006)
Top 1 ETF Top 2 ETFs
14.5% 15.0%
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ETF Value Signal
for 2nd Quarter 2015 (Final)

Cash

IEF

LQD

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The asset with the highest allocation is the holding of the Best Value strategy.
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