Category Archives: Strategy

A Santa Claus Rally? Yes, Virginia…

Theories that aim to predict stock market performance range from the complicated and impenetrable to the arcane and simply ridiculous.  But some are wonderfully clear: for example, December is usually a good month.  In the festive spirit, and not to be taken too seriously,  we've duly found that the evidence supports the existence of a “Santa Claus Rally”. Our test of choice, which we may as well call a “Santa Score”, is the result of dividing the average performance each December Read more [...]

Fear of Falling Prices

Anxiety over deflation is wide-spread and increasing.  The New York Times lead editorial on Sunday warned that weakening commodity prices may be a harbinger deflation or a hint of economic decline.   Despite a few contrary voices, both policy makers and investors seem concerned.  Are the fears misplaced? Or would deflation be a large step backward? The chart shows 101 years of American inflation measured by the CPI. Prices move all the time – not just stock prices but prices of almost Read more [...]

Real Estate Rising and GICS

Real estate, once the villain of the financial crisis, is now lauded as the place to find yield, diversification and maybe stability.  Before REITs became eligible for the S&P 500 in October 2001, real estate investing either meant direct ownership or a specialized corner of the stock market.   The recovery from the financial crisis focused attention on real estate and REITs to understand what happened and why.  With equity markets at record highs and yields and interest rates at record lows, Read more [...]

Bumpy Roads Ahead in European Equities

Three things typify systemic equity crises. Firstly, volatility increases. Secondly, correlations rise. And lastly, the stock market falls. October was a difficult month for European equities. The S&P Europe 350 fell by over 3%, taking a day-to-day lead from Greek government bond prices, and with every sector and nearly every country posting a loss for the month.  A 3% loss is not unusual, nor remarkable. But the warning lights are flashing… 22-day realized volatility in the S&P Read more [...]

No Big Deal

Twenty years from now, some bright young analyst looking at data for the U.S. stock market could be excused for thinking that the S&P 500’s 2.4% total return for October 2014 was no big deal – just one more routine good month in a long bull run.  If the analyst is particularly inquisitive, he might wonder why strategies that we typically regard as defensive outperformed – for example, the S&P 500 Dividend Aristocrats (up 4.4%), or the S&P 500 Low Volatility Index (up 4.9%).  That’s Read more [...]

Bonds in a Rising Interest Rate Environment

After last week’s FOMC meeting, the time when interest rates begin a sustained rise propelled by the Federal Reserve may be drawing closer.  The received wisdom is that no one should own bonds when interest rates are rising because rising rates mean falling bond prices.  While the math demands that bond prices fall, a deeper look at the math reveals that all may not be lost. Some investors believe that the yield to maturity on a bond measures the return they will earn if they hold the bond Read more [...]

Fed a Small Step Closer to Raising rates

Fed a Small Step Closer to Raising rates Today’s FOMC statement published after the meeting is more upbeat than the last one in discussing the labor markets and the inflation outlook.  The FOMC noted “solid gains and a lower unemployment rate” and that the “likelihood of inflation running persistently below 2 percent has diminished somewhat” despite lower oil prices.  In announcing the end of QE, the statement noted “substantial improvements in the outlook for the labor market since” Read more [...]

The VIX Takes a Hairpin Turn

I have a neighbor who is cooler than me. He is braver than me. He also has more expansive and expensive medical and auto insurance than I do. How do I know all this? Well, he races street motorcycles. The other day I asked him what was the fastest he had ever gone. His answer: "Very fast, but that's not where the thrill is. The adrenaline rush comes from handling and powering through the curves." The movements in the CBOE Volatility Index (VIX) the past few weeks have made me reflect on this Read more [...]

The VIX is at a crossroads – mind the gap.

As you, dear patient reader, have no doubt noticed, volatility is back. The VIX® has reached levels not seen since the peak of the Eurozone crisis over two years ago. The exact reasons might be debatable, but either way October is living up to its perennial reputation as the cruelest month for equities. Source: CBOE Each time in recent history that the VIX closed above 20, it has rapidly collapsed (see above). And duly following the principle of induction, spikes in volatility are now interpreted Read more [...]

The Best Offense

Some American football coaches are fond of citing the maxim that the best offense is a good defense -- because even if your offense is having an unproductive day, a good defense means that you're always in the game. A related principle applies to investing -- in some environments, the best way to win is not to lose. The first half of October has been such an environment, as defensive indices, laggards in 2013 and for the first three quarters of 2014, have finally come into their own. The chart Read more [...]