Objective research to aid investing decisions

Value Investing Strategy (Strategy Overview)

Allocations for October 2021 (Final)
Cash TLT LQD SPY

Momentum Investing Strategy (Strategy Overview)

Allocations for October 2021 (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.

Corporate Debt-to-GDP Ratio as a Stock Market Indicator

A subscriber asked whether risk assets tend to struggle for about two years after low values of the ratio of corporate debt to Gross Domestic Product (GDP). To investigate, we use Non-financial Corporate Debt Securities and Loans as a proxy for corporate debt. Both debt and GDP series are quarterly, seasonally adjusted and have release delays of about one quarter. We then form the corporate debt-to-GDP ratio and relate its behavior to that of the S&P 500 Index. Using quarterly data for the three series from the fourth quarter of 1951 (limited by availability of quarterly data for the debt series) through the second quarter of 2021 for the economic/financial series and the third quarter of 2021 for the S&P 500 Index, we find that: Keep Reading

Inflation Forecast Update

The Inflation Forecast now incorporates actual total and core Consumer Price Index (CPI) data for September 2021. The actual total (core) inflation rate is slightly higher than (the same as) forecasted.

Asset Class Reactions to Monthly Inflation Data

How do individual asset classes react to monthly inflation indications? To investigate, we relate future monthly returns for the following asset class exchange-traded fund (ETF) proxies to monthly changes in the U.S. Consumer Price Index (CPI):

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

Using monthly CPI data (all items) and monthly dividend-adjusted returns for the above 10 asset class proxy ETFs as available from July 2002 through September 2021, 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 August 2021, we find that: Keep Reading

Do Any Sector ETFs Reliably Lead or Lag the Market?

Do any of the major U.S. stock market sectors systematically lead or lag the overall market, perhaps because of some underlying business/economic cycle? To investigate, we examine the behaviors of the nine sectors defined by the Select Sector Standard & Poor’s Depository Receipts (SPDR) exchange traded funds (ETF):

Materials Select Sector SPDR (XLB)
Energy Select Sector SPDR (XLE)
Financial Select Sector SPDR (XLF)
Industrial Select Sector SPDR (XLI)
Technology Select Sector SPDR (XLK)
Consumer Staples Select Sector SPDR (XLP)
Utilities Select Sector SPDR (XLU)
Health Care Select Sector SPDR (XLV)
Consumer Discretionary Select SPDR (XLY)

Using monthly dividend-adjusted closing prices for these ETFs, along with contemporaneous data for SPDR S&P 500 (SPY) as a benchmark, during December 1998 (sector ETF inception) through August 2021, we find that: Keep Reading

SACEVS Input Risk Premiums and EFFR

The “Simple Asset Class ETF Value Strategy” (SACEVS) seeks diversification across a small set of asset class exchanged-traded funds (ETF), plus a monthly tactical edge from potential undervaluation of three risk premiums:

  1. Term – monthly difference between the 10-year Constant Maturity U.S. Treasury note (T-note) yield and the 3-month Constant Maturity U.S. Treasury bill (T-bill) yield.
  2. Credit – monthly difference between the Moody’s Seasoned Baa Corporate Bonds yield and the T-note yield.
  3. Equity – monthly difference between S&P 500 operating earnings yield and the T-note yield.

Premium valuations are relative to historical averages. How might this strategy react to changes in the Effective Federal Funds Rate (EFFR)? Using end-of-month values of the three risk premiums, EFFRtotal 12-month U.S. inflation and core 12-month U.S. inflation during March 1989 (limited by availability of operating earnings data) through August 2021, we find that: Keep Reading

Comparing the Sahm Indicator and the Yield Curve

In response to “Combining SMA10 and Sahm Indicator”, a subscriber asked for a comparison of signals generated by the Sahm Recession Indicator (Sahm) and by yield curve inversion. The former signals a recession when the 3-month simple moving average (SMA) of the U.S. unemployment rate is at least 0.5% higher than its low during the last 12 months. The latter signals a recession when the yield on the 3-month U.S. Treasury bill (T-bill) rises above the yield on the 10-year U.S. Treasury note (T-note). To investigate, we calculate average monthly returns and standard deviations of monthly returns for the S&P 500 Index (SP500):

  • When Sahm does not indicate a recession and, separately, when it does.
  • When the yield curve does not indicate a recession and, separately, when it does.
  • When SP500 is below its 10-month SMA (SMA10) and, separately, when it is above (for additional perspective).

Using end-of-month levels of SP500 since March 1959, Sahm levels since inception in December 1959 (history vintage 8/6/2021) and T-bill and T-note yields since December 1959, all through July 2021, we find that:

Keep Reading

Should the “Anxious Index” Make Investors Anxious?

Since 1990, the Federal Reserve Bank of Philadelphia has conducted a quarterly Survey of Professional Forecasters. The American Statistical Association and the National Bureau of Economic Research conducted the survey from 1968-1989. Among other things, the survey solicits from experts probabilities of U.S. economic recession (negative GDP growth) during each of the next four quarters. The survey report release schedule is mid-quarter. For example, the release date of the third quarter 2021 report is August 13, 2021, with forecasts through the third quarter of 2022. The “Anxious Index” is the probability of recession during the next quarter. Are these forecasts meaningful for future U.S. stock market returns? Rather than relate the probability of recession to stock market returns, we instead relate one minus the probability of recession (the probability of good times). If forecasts are accurate, a relatively high (low) forecasted probability of good times should indicate a relatively strong (weak) stock market. Using survey results and quarterly S&P 500 Index levels (on survey release dates as available, and mid-quarter before availability of release dates) from the fourth quarter of 1968 through the third quarter of 2021 (212 surveys), we find that:

Keep Reading

Combining SMA10 and Sahm Indicator

A subscriber asked about a stock market timing strategy that combines the market 10-month simple moving average (SMA10) and the Sahm Recession Indicator (Sahm), which signals the start of a recession when the 3-month SMA of the U.S. unemployment rate is at least 0.5% higher than its low during the last 12 months. Specifically, the strategy:

  • Holds the S&P 500 Index (SP500) unless it is below its SMA10 and Sahm first signals a recession.
  • Subsequently holds cash until SP500 crosses above its SMA10.

To investigate, we compare three alternative strategies:

  1. SP500 – buy and hold the index.
  2. SMA10 – hold the index only while it is above its SMA10 and otherwise hold cash.
  3. SMA10+Sahm – combined signals as specified above.

We focus on average monthly return, standard deviation of monthly returns, monthly reward/risk (average return divided by standard deviation), compound annual growth rate (CAGR) and maximum drawdown (MaxDD) as key performance metrics. Using end-of-month levels of SP500 since March 1959, Shiller’s monthly SP500 dividends (to estimate SP500 total returns) since January 1960, Sahm since inception in December 1959 (history vintage 8/6/2021) and T-bill yield since December 1959, all through July 2021, we find that:

Keep Reading

Misery Index and Future U.S. Stock Market Returns

Does the Misery Index, the sum of the U.S. total inflation rate and the U.S. unemployment rate, predict U.S. stock market returns? To investigate, we relate monthly Misery Index and monthly change in Misery Index to monthly S&P 500 Index (SP500) returns. Using monthly Misery Index level and monthly SP500 level during January 1948 (limited by the Misery Index) through June 2021, we find that: Keep Reading

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