Objective research to aid investing decisions

Value Investing Strategy (Strategy Overview)

Allocations for April 2024 (Final)
Cash TLT LQD SPY

Momentum Investing Strategy (Strategy Overview)

Allocations for April 2024 (Final)
1st ETF 2nd ETF 3rd ETF

Economic Indicators

The U.S. economy is a very complex system, with indicators therefore ambiguous and difficult to interpret. To what degree do macroeconomics and the stock market go hand-in-hand, if at all? Do investors/traders: (1) react to economic readings; (2) anticipate them; or, (3) just muddle along, mostly fooled by randomness? These blog entries address relationships between economic indicators and the stock market.

U.S. Debt Ceiling Changes and the U.S. Stock Market

How does the U.S. stock market typically react to U.S. debt ceiling discussions/actions? To investigate, we look at cumulative S&P 500 Index returns around actions to change the debt ceiling. Using daily S&P 500 Index returns and debt ceiling action dates during mid-June 1940 through May 2023 (90 quantitative actions), we find that: Keep Reading

Yield Curve as a Stock Market Indicator

Conventional wisdom holds that a steep yield curve (wide U.S. Treasuries term spread) is good for stocks, while a flat/inverted curve is bad. Is this wisdom correct and exploitable? To investigate, we consider in-sample tests of the relationships between several yield curve metrics and future U.S. stock market returns and two out-of-sample signal-based tests. Using average monthly yields for 3-month Treasuries (T-bill), 1-year Treasuries, 3-year Treasuries, 5-year Treasuries and 10-year Treasuries (T-note) as available since April 1953, monthly levels of the S&P 500 Index since April 1953 and monthly dividend-adjusted levels of SPDR S&P 500 (SPY) since January 1993, all through March 2023, we find that: Keep Reading

Expert Estimates of 2023 Country Equity Risk Premiums and Risk-free Rates

What are current estimates of equity risk premiums (ERP) and risk-free rates around the world? In their April 2023 paper entitled “Survey: Market Risk Premium and Risk-Free Rate used for 80 countries in 2023”, Pablo Fernandez, Diego García de la Garza and Javier Acin summarize results of a March 2023 email survey of international economic professors, analysts and company managers “about the Risk-Free Rate and the Market Risk Premium (MRP) used to calculate the required return to equity in different countries.” Results are in local currencies. Based on 3,812 specific and credible premium estimates spanning 80 countries for which there are at least six estimates, they find that: Keep Reading

Growth Versus Value and Interest Rates

In his 2007 book The Little Book That Makes You Rich: A Proven Market-Beating Formula for Growth Investing, expert Louis Navellier hypothesizes that growth (value) stocks tend to do relatively better when interest rates are rising (falling). Growth stocks benefit from the economic expansions associated with rising rates. Value stocks benefit from refinancing opportunities as interest rates fall. To test this hypothesis, we compare the performances of the following paired growth and value exchange-traded funds (ETF) and mutual funds as interest rates, proxied by the yield on the 10-year U.S. Treasury note (T-note), vary:

We consider both abstract predictive power based on correlation of changes in T-note yield with future fund returns and explicit performance of a strategy that switches between value and growth according to changes in T-note yield. Using end-of-month dividend-adjusted prices for the selected funds and contemporaneous T-note yield starting January 1983 for the mutual funds (limited by FDGRX) and May 2000 for the ETFs, all through February 2023, we find that: Keep Reading

CPI and Stocks Over the Short and Intermediate Terms

Do investors reliably react over short and intermediate terms to changes in the U.S. Consumer Price Index (CPI), a logical measure of the wealth discount rate? Using monthly total and core (excluding food and energy) CPI releases (for all items, not seasonally adjusted) from the Bureau of Labor Statistics (BLS) and contemporaneous S&P 500 Index opens and closes during mid-January 1994 (earliest available CPI release dates) through mid-March 2023 (351 releases), we find that: Keep Reading

Weekly Economic Index and Asset Returns

The Weekly Economic Index (WEI) is a composite of weekly year-over-year percentage changes in 10 economic indicators: Redbook same-store sales; Rasmussen Consumer Index; new claims for unemployment insurance; continued claims for unemployment insurance; adjusted income/employment tax withholdings; railroad traffic originated; the American Staffing Association Staffing Index; steel production; wholesale sales of gasoline, diesel and jet fuel; and, weekly average US electricity load. Does WEI usefully predict U.S. stock market and government bond returns? To investigate, we relate WEI to performance data for SPDR S&P 500 (SPY) as a proxy for the stock market and iShares Barclays 20+ Year Treasury Bond (TLT) as a proxy for government bonds. Since WEI measurements are nominally Saturdays but released mid-day the next Thursdays, we align its values with SPY and TLT prices as of the close on the next Thursdays. Using weekly data as described during January 2008 (limited by WEI) through mid-February 2023, we find that: Keep Reading

Exploiting Credit Standard Changes to Time the Stock Market

Can investors exploit information about business credit tightening/loosening as reported since 1990 in the Federal Reserve’s quarterly Senior Loan Officer Survey to time the U.S. stock market? In the January 2023 draft of his paper entitled “Profitable Timing of the Stock Market with the Senior Loan Officer Survey”, Linus Wilson examines the power of “Net Percentage of Domestic Banks Tightening Standards for Commercial and Industrial Loans to Large and Middle-Market Firms” to predict S&P 500 Index next-quarter returns. A positive (negative) reading means that credit conditions are tightening (loosening) for large and medium-sized firms. Specifically, he relates January survey results to subsequent April-June stock market returns, May survey results to July-September returns, August survey results to October-December returns and November survey results to January-March returns. He considers the full sample of 32 years, two subperiods of 15 years and three subperiods of 10 years. For portfolio tests, he uses the first 15-year subperiod to model allocation decisions to the S&P 500 Index/3-month U.S. Treasury bills (either long-short the stock index or long-only the index) and applies the model to a July 2005 through March 2022 test period. Using quarterly survey results, monthly S&P 500 Index levels and monthly estimated S&P 500 dividends (from Shiller’s data) during April 1990 through March 2022, he finds that: Keep Reading

Recent Interactions of Asset Classes with Effective Federal Funds Rate

How do returns of different asset classes recently interact with the Effective Federal Funds Rate (EFFR)? We focus on monthly changes (simple differences) in EFFR  and look at lead-lag relationships between change in EFFR and returns for each of the following 10 exchange-traded fund (ETF) asset class proxies:

  • Equities:
    • SPDR S&P 500 (SPY)
    • iShares Russell 2000 Index (IWM)
    • iShares MSCI EAFE Index (EFA)
    • iShares MSCI Emerging Markets Index (EEM)
  • Bonds:
    • iShares Barclays 20+ Year Treasury Bond (TLT)
    • iShares iBoxx $ Investment Grade Corporate Bond (LQD)
    • iShares JPMorgan Emerging Markets Bond Fund (EMB)
  • Real assets:
    • Vanguard REIT ETF (VNQ)
    • SPDR Gold Shares (GLD)
    • Invesco DB Commodity Index Tracking (DBC)

Using monthly EFFR and monthly dividend-adjusted prices for the 10 ETFs during December 2007 (limited by EMB) through December 2022, we find that: Keep Reading

Retail Sales Growth and Stock Market Returns

Do monthly retail sales data reliably predict U.S. stock market behavior? To investigate, we relate monthly change in retail sales to monthly S&P 500 Index return. We consider both seasonally adjusted (SA) and non-seasonally adjusted (NSA) retail sales series, as compiled by the the U.S. Census Bureau. Using monthly levels of retail sales and the S&P 500 Index during January 1992 (limited by retail sales data) through October 2022, we find that: Keep Reading

Stocks-Bonds Return Correlation and Inflation

A subscriber asked whether the correlation between returns on stocks and bonds is elevated when inflation is above 5%, such that equities and fixed income offer little diversification protection. To investigate, we calculate the U.S. overall inflation rate from monthly values of the consumer price index over the prior year to find months with the inflation rate over 5%. We then compute monthly total return correlations for the following two pairs of funds when inflation is above or not above 5%:

  1. Fidelity Fund (FFIDX) and Fidelity Investment Grade Bond Fund (FBNDX).
  2. SPDR S&P 500 ETF Trust (SPY) and iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD).

Using monthly dividend-adjusted prices for FFIDX and FBNDX since January 1980 and for SPY and LQD since July 2002, all through September 2022, we find that:

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