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.
May 22, 2015
May 22, 2015
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.
May 22, 2015
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
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
May 20, 2015
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
May 19, 2015
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
May 19, 2015
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
May 18, 2015
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