Investing Research Articles

Many stock market commentators cite Gross Domestic Product (GDP) growth as an indicator of stock market prospects, and the financial media dutifully report advance, preliminary and final U.S. GDP growth rates each month on a quarterly cycle. Does GDP or any of its Personal Consumption Expenditures (PCE), Private Domestic Investment (PDI) and government spending components usefully predict stock market returns? Using quarterly and annual seasonally adjusted nominal (final) GDP data as available from the Bureau of Economic Analysis (BEA) during January 1929 through March 2013 (about 83 years) and contemporaneous levels of the S&P 500 Index (since 1950) and the Dow Jones Industrial Average (DJIA), we find that: More…

Has crude oil turned into paper from an investment perspective? In their May 2013 paper entitled “Oil Prices, Exchange Rates and Asset Prices”, Marcel Fratzscher, Daniel Schneider and Ine Van Robays examine relationships between crude oil price and behaviors of other asset classes. Specifically, they relate spot West Texas Intermediate (WTI) crude oil price to: the U.S. dollar exchange rate versus a basket of developed market currencies; Dow Jones Industrial Average (DJIA) return; U.S. short-term interest rate; the S&P 500 options-implied volatility index (VIX); and, open interest in the NYMEX crude oil futures (as an indication of financialization of the oil market). They also test the response of crude oil price to economic news. Using daily data for these financial series during January 2001 through mid-October 2012, and contemporaneous U.S. economic news and associated expectations, they find that: More…

To determine whether the stock market is expensive or cheap, some experts use aggregate valuation ratios, either trailing or forward-looking, such as earnings-price ratio (E/P) and dividend yield. Operating under a belief that such ratios are mean-reverting, most imminently due to movement of stock prices, these experts expect high (low) future stock market returns when these ratios are high (low). Where are the ratios now? Using the S&P 500 Index level as of the close on 6/4/13 and the most recent actual and forecasted earnings and dividend data from Standard & Poor’s, we find that: More…

Do currency exchange rates exhibit short-term momentum? In the April 2013 version of their paper entitled “Is There Momentum or Reversal in Weekly Currency Returns?”, Ahmad Raza, Ben Marshall and Nuttawat Visaltanachoti investigate whether exchange rate movements over the past one to four weeks persist over the next one to four weeks. They test these 16 alternative strategies (four look-back intervals times four holding intervals) by each week buying (selling) the fifth of available currencies that have appreciated (depreciated) the most against the U.S. dollar. Using weekly and monthly spot and forward prices for 63 emerging and developed market currencies versus the U.S. dollar as available during October 1997 through December 2011, they find that: More…

Using quarterly data in their April 2013 preliminary paper entitled “Analyzing Federal Reserve Asset Purchases: From Whom Does the Fed Buy?” Seth Carpenter, Selva Demiralp, Jane Ihrig and Elizabeth Klee find that some categories of investors appear to sell U.S. Treasuries to the Federal Reserve and rebalance toward riskier assets (corporate bonds, commercial paper, and municipal debt). Are stocks a part of this process? To investigate, we relate weekly, monthly and quarterly U.S. stock market returns (proxied by the S&P 500 Index returns) to comparable changes in the Federal Reserve’s System Open Market Account (SOMA) holdings, comprised of U.S. Treasury bills, U.S. Treasury notes and bonds, U.S. Treasury Inflation-Protected Securities (TIP) and Mortgage-Backed Securities (MBS). The Federal Reserve reports these holdings with a small lag. Using weekly data (Wednesday closes) for the S&P 500 Index total SOMA holdings during July 2003 through May 2013, we find that: More…

“Intraday U.S. Stock Market Behavior” examines behavior of the S&P 500 Index at 15-minute intervals over the trading day during each of 2007 (bullish year) and 2008 (bearish year), finding slight tendencies for market weakness during mid-afternoon and market volatility at the beginning and the end of the trading day. Does recent data confirm these findings? To investigate, we calculate average cumulative returns and standard deviations of returns for both the S&P 500 Index and SPDR S&P 500 (SPY) measured at 5-minute intervals during the trading day over the last six months. Using 5-minute levels/prices for the S&P 500 Index and for SPY during 9:30-16:00 over the period August 2012 through May 2013, we find that: More…

Many stock market experts cite the year (1, 2, 3 or 4) of the U.S. presidential term cycle as a useful indicator of U.S. stock market returns. Game theory suggests that presidents deliver bad news immediately after being elected and do everything in their power to create good news just before ensuing biennial elections. Are some presidential term cycle years reliably good or bad? If so, are these abnormal returns concentrated in certain quarters? Finally, what does the stock market do in the period immediately before and after a national election? Using S&P 500 Index data from January 1950 through May 2013 (over 63 years and 15 presidential terms) and focusing on “political quarters” (Feb-Apr, May-Jul, Aug-Oct and Nov-Jan), we find that: More…

We have updated the Market Models summary as follows:

• Extended regressions/rolled projections by one month based on data available through May 2013.
• Updated backtest charts and the market valuation metrics map based on data available through May 2013.

We have updated the Trading Calendar to incorporate data for May 2013.

We have updated the the monthly asset class momentum winners and associated performance data at Momentum Strategy.

The home page and “Momentum Strategy” now show preliminary asset class momentum strategy positions for June 2013. The differences in past returns between the first and second places is small, so these two preliminary selections could switch by the end of the day. The third place is unlikely to change.

Do investors demand a risk premium for divided government because of the policy uncertainty of gridlock? In the April 2013 preliminary draft of their paper entitled “Divided Governments and Asset Prices”, Elvira Sojli and Wing Wah Tham„ investigate the effect of divided government on asset prices by comparing U.S. stock market performance in years of divided and undivided government. They define divided government (in the U.S.) as one party holding the Presidency while the other controls one or both houses of Congress. To isolate the effects of divided government, they account for the states of four variables widely used to predict stock market returns: dividend-price ratio; credit default spread, the difference between BAA and AAA corporate bond yields; term spread, the difference between 10-year U.S. Treasury note and 3-month U.S. Treasury bill (T-bill) yields; and, deviation of the 3-month T-bill yield from its one-year moving average. To determine causality, they investigate stock market futures reactions to betting market predictions of divided versus undivided government during four election nights. Using monthly U.S. stock market returns, data for the four stock return predictors and U.S. Treasury bill yields during 1926 through 2011 (encompassing 43 elections resulting in 23 undivided and 20 divided governments), and high-frequency election outcome betting data (from Intrade) and U.S. stock market futures on biennial election nights during 2004 through 2010, they find that: More…