Markets expect elevated volatility surrounding the U.S. Presidential election, now just six weeks away. The VIX futures curve currently peaks in November, but as long ago as April a close observer could detect expectations of electoral volatility. Increased volatility may create an unusual opportunity for sector allocators. To understand why, we need to remember that…
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The market has recovered most of the losses from March’s uproar, with the S&P/TSX Composite Index down 4.8% in 2020 through Sept. 17. Volatility, though off its March peak, continues to be high but has been evenly distributed across all sectors of the market. Since all sectors experienced similar increases in volatility, it’s not surprising…
In the first decade of the 2000s, the U.S. and other developed countries fell behind emerging market equities by a wide margin, and they lagged China’s markets in particular: the S&P China BMI grew by 600% in the first decade of the new millennium. The 2010s saw a reversal of fortunes for broad-based emerging market…
Philosophers have long argued that courage is the most essential human virtue, because without courage, all other virtues lie in jeopardy. Remarkably, the theorizing of ethicists has an implication for practical portfolio management. We can illustrate this with a simple example in Exhibit 1. It’s Dec. 31, 1999, and a professional investor is considering buying…
As of the end of August 2020, the S&P 500® Information Technology sector had risen a remarkable 36% YTD. Such outstanding relative performance of course reminds us of the late 1990s, when the markets experienced a technology bubble and subsequent bust. One notable resemblance to the late 1990s is Information Technology’s weight in the S&P…
As the recovery from the Global Financial Crisis edged forward in the early 2010s, inflation hawks warned about the “certainty” of an imminent spike in inflation following the aggressive stimulus measures taken by global central banks. Unfortunately for the U.S. Federal Reserve and some of its other monetary counterparts, that certainty never materialized, and it…
In recent days the S&P 500 reached multiple new highs, despite the still-uncertain nature of the economy’s recovery from the COVID-19 pandemic. Year to date through Aug. 20, 2020, the S&P 500 is up 6% while the S&P 500 Low Volatility Index is down 6%. Market volatility remains high, as evidenced by the charts in…
In politics, “regime change” denotes the replacement of one governmental structure with another; in economics, we use the same term to indicate a shift in the interactions of various parts of the economic or financial system. Political regime changes are easy to identify (after all, a military coup is hard to miss). Defining when an…
As a potential investor, would you be impressed by the pattern of fund returns summarized in Exhibit 1? (I would be.) Exhibit 1. Portfolio and Benchmark Cumulative Returns Over the course of 15 years, the portfolio in question notched a total return of 69%, versus only 50% for its benchmark. The accumulation of added value…
Volatility, dispersion, and correlation are elements of what we’ve elsewhere characterized as The Active Manager’s Conundrum. Active managers should prefer: Low volatility, which is typically associated with higher returns High dispersion, which means a larger payoff for correct stock selections High correlation, which reduces the opportunity cost of a concentrated portfolio The conundrum arises because…
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