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Value Allocations for December 2019 (Final)
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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.

Asset Class ETF Interactions with the Yuan

How do different asset classes interact with the Chinese yuan-U.S. dollar exchange rate? To investigate, we consider relationships between WisdomTree Chinese Yuan Strategy (CYB) and the exchange-traded fund (ETF) asset class proxies used in “Simple Asset Class ETF Momentum Strategy” (SACEMS) at a monthly measurement frequency. Using monthly dividend-adjusted closing prices for CYB and the asset class proxies during May 2008 (when CYB is first available) through July 2019 (135 months), we find that: Keep Reading

Asset Class ETF Interactions with the U.S. Dollar

How do different asset classes interact with U.S. dollar valuation? To investigate, we consider relationships between Powershares DB US Dollar Index Bullish Fund (UUP) and the exchange-traded fund (ETF) asset class proxies used in “Simple Asset Class ETF Momentum Strategy” (SACEMS) at a monthly measurement frequency. Using monthly dividend-adjusted closing prices for UUP and the asset class proxies since March 2007 as available through July 2019, we find that: Keep Reading

FFR Actions, Stock Market Returns and Bond Yields

A subscriber wondered whether U.S. stock market movements predict Federal Funds Rate (FFR) actions taken by the Federal Reserve open market operations committee. To investigate and evaluate usefulness of findings, we relate three series:

  1. FFR actions per the above source, along with recent and historical committee meeting dates.
  2. S&P 500 Index returns.
  3. Changes in yield for the 10-Year U.S. Constant Maturity Treasury note (T-note).

In constructing the first series, for Federal Reserve open market operations committee meeting dates which do not produce FFR changes, we quantify committee actions as 0%. We ignore committee conference calls that result in no changes in FFR. We calculate the second and third series between committee meeting dates because that irregular interval represents new information to the committee and potential exploitation points for investors. Using data for the three series during January 1990 through early August 2019, we find that:

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SMA10 vs. OFR FSI for Stock Market Timing

In response to “OFR FSI as Stock Market Return Predictor”, a subscriber suggested overlaying a 10-month simple moving average (SMA10) technical indicator on the Office of Financial Research Financial Stress Index (OFR FSI) fundamental indicator for timing SPDR S&P 500 (SPY). The intent of the suggested overlay is to expand risk-on opportunities safely. To test the overlay, we add four strategies (4 through 7) to the prior three, each evaluated since January 2000 and since January 2009:

  1. SPY – buy and hold SPY.
  2. OFR FSI-Cash – hold SPY (cash as proxied by 3-month U.S. Treasury bills) when OFR FSI at the end of the prior month is negative or zero (positive).
  3. OFR-FSI-VFITX – hold SPY (Vanguard Intermediate-Term Treasury Fund Investor Shares, VFITX, as a more aggressive risk-off asset than cash) when OFR FSI at the end of the prior month is negative or zero (positive).
  4. SMA10-Cash – hold SPY (cash) when the S&P 500 Index is above (at or below) its SMA10 at the end of the prior month.
  5. SMA10-VFITX – hold SPY (VFITX) when the S&P 500 Index is above (at or below) its SMA10 at the end of the prior month.
  6. OFR-FSI-SMA10-Cash – hold SPY (cash) when either signal 2 or signal 4 specifies SPY. Otherwise, hold cash.
  7. OFR-FSI-SMA10-VFITX – hold SPY (cash) when either signal 3 or signal 5 specifies SPY. Otherwise, hold VFITX.

Using end-of-month values of OFR FSI, SPY total return and level of the S&P 500 Index during January 2000 (OFR FSI inception) through June 2019, we find that:

Keep Reading

Gold Price Drivers?

What drives the price of gold: inflation, interest rates, stock market behavior, public sentiment? To investigate, we relate monthly and annual spot gold return to changes in:

We start testing in 1975 because: “On March 17, 1968, …the price of gold on the private market was allowed to fluctuate…[, and] in 1975…the price of gold was left to find its free-market level.” We lag CPI measurements by one month to ensure they are known to the market when calculating gold return. Using monthly data from December 1974 (March 1978 for consumer sentiment) through July 2019, 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 June 2019, we find that: Keep Reading

Federal Reserve Treasuries Holdings and Asset Returns

Is the level, or changes in the level, of Federal Reserve (Fed) holdings of U.S. Treasuries (bills, notes, bonds and TIPS, measured weekly as of Wednesday) an indicator of future stock market and/or Treasuries returns? To investigate, we take dividend-adjusted SPDR S&P 500 (SPY) and iShares Barclays 20+ Year Treasury Bond (TLT) as tradable proxies for the U.S. stock and Treasuries markets, respectively. Using weekly Fed holdings of Treasuries, SPY and TLT during mid-December 2002 through mid-July 2019, we find that: Keep Reading

Stock Market Earnings Yield and Inflation Over the Long Run

How does the U.S. stock market earnings yield (inverse of price-to-earnings ratio, or E/P) interact with the U.S. inflation rate over the long run? Is any such interaction exploitable? To investigate, we employ the long run dataset of Robert Shiller. Using monthly data for the S&P Composite Stock Index, estimated aggregate trailing 12-month earnings and dividends for the stocks in this index, and estimated U.S. Consumer Price Index (CPI) during January 1871 through June 2019 (over 148 years), and estimated monthly yield on 1-year U.S. Treasury bills (T-bills) since January 1951, we find that:

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Leading Economic Index and the Stock Market

The Conference Board “publishes leading, coincident, and lagging indexes designed to signal peaks and troughs in the business cycle for major economies around the world,” including the widely cited Leading Economic Index (LEI) for the U.S. Does the LEI predict stock market behavior? Using the as-released monthly change in LEI from archived Conference Board press releases and contemporaneous dividend-adjusted daily levels of SPDR S&P 500 (SPY) for June 2002 through mid-July 2019 (206 monthly LEI observations), we find that: Keep Reading

OFR FSI as Stock Market Return Predictor

Is the Office of Financial Research Financial Stress Index (OFR FSI), described in “The OFR Financial Stress Index”, useful as a U.S. stock market return predictor? OFR FSI is a daily snapshot of global financial market stress, distilling more than 30 indicators via a dynamic weighting scheme. The index drops and adds indicators over time as some become obsolete and new ones become available. Unlike some other financial stress indicators, past OFR FSI series values do not change due to any periodic renormalization and are therefore suitable for backtesting. To investigate OFR FSI power to predict U.S. stock market returns, we relate level of and change in OFR FSI to SPDR S&P 500 (SPY) returns. Using daily and monthly values of OFR FSI and SPY total returns during January 2000 (OFR FSI inception) through June 2019, we find that:

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