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Value Investing Strategy (Strategy Overview)

Allocations for May 2022 (Final)
Cash TLT LQD SPY

Momentum Investing Strategy (Strategy Overview)

Allocations for May 2022 (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.

Cass Freight Index a Stock Market Return Predictor?

The monthly Cass Freight Index is a “measure of North American freight volumes [shipments] and expenditures… Data within the Index includes all domestic freight modes and is derived from $28 billion in freight transactions processed by Cass annually on behalf of its client base of hundreds of large shippers. These companies represent a broad sampling of industries including consumer packaged goods, food, automotive, chemical, OEM, retail and heavy equipment… The diversity of shippers and aggregate volume provide a statistically valid representation of North American shipping activity. …Volumes represent the month in which transactions are processed by Cass, not necessarily the month when the corresponding shipments took place. The January 1990 base point is 1.00. …Each month’s volumes are adjusted to provide an average 21-day work month. Adjustments also are made to compensate for business additions/deletions to the volume figures.” Cass typically publishes the index level for a month about the middle of the following month. Does freight data usefully anticipate economic trend and thereby U.S. stock market returns? To investigate, we relate level of shipments and changes in shipments and expenditures to SPDR S&P 500 (SPY) returns. Using monthly Cass Freight Index levels and monthly dividend-adjusted SPY returns as available during January 1993 (limited by inception of SPY) through October 2021, 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 through Saturdays, we align its values with SPY and TLT prices at the first daily close of the following week. Using weekly data as described during January 2008 (limited by WEI) through October 2021, 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 late October 2021 (334 releases), we find that: Keep Reading

Quit Rate and Future Asset Returns

Does the U.S. employment quit rate, a measurement from the Job Openings and Labor Turnover Survey run monthly by the U.S. Bureau of Labor Statistics, have implications for future U.S. stock market or U.S. Treasury bond return? A high (low) quit rate may indicate a strong (weak) economy and/or may signal high (low) wage inflation. To investigate, we relate quit rate to future performance of SPDR S&P 500 (SPY) as a proxy for the stock market and of iShares 20+ Year Treasury Bond (TLT) as a proxy for government bonds. Using monthly quit rate (which has a release delay of about six weeks) during December 2000 through August 2021 and monthly dividend-adjusted returns for SPY and TLT as available during December 2000 through September 2021, we find that: Keep Reading

Public Debt, Inflation and the Stock Market

When the U.S. government runs substantial deficits, some experts proclaim the dollar’s inevitable inflationary debasement and bad times for stocks. Other experts say that deficits are no cause for alarm, because government spending stimulates the economy, and the country can bear more debt. Who is right? Using annual (end of fiscal year, FY) levels of the U.S. public debtinterest expenses on the debtU.S. Gross Domestic Product (GDP), S&P 500 Index (SP500) returns and inflation rate as available during June 1928 through September 2021 (about 93 years), we find that: Keep Reading

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

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

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