DIY Trend-Following Allocations: September 2022
Current Exposures:
- No exposure to domestic equities.
- No exposure to international equities.
- No exposure to REITs.
- Full exposure to commodities.
- No exposure to intermediate-term bonds.
Is Relative Sentiment an Anomaly?
Relative sentiment is an indicator that measures the positions, flows, and attitudes of institutional investors compared to those of individual investors–where institutions typically consist of large asset managers, insurance companies, pension funds, and endowments. In some instances, however–depending on the dataset and the asset class under consideration–institutions might also include hedge funds, CTAs, and other large speculators.
Treasury Bonds: Buy and Hold or Trend Follow?
If one had to invest in buy and hold treasury bonds or trend-followed treasury bonds, it is likely that most investors would prefer the trend-followed bond investment. However, in a broader portfolio context, the analysis suggests that how one 'eats' their bond exposure is largely irrelevant and the portfolio's long-term outcome will be driven by equity market dynamics. Bonds systematically lower an equity-centric portfolio's returns, but they also lower the risk profile of the overall portfolio.
Global Factor Performance: August 2022
Standardized Performance Factor Performance Factor Exposures Factor Premiums Factor Attribution Factor Data Downloads
Trend Following Says Commodities…But Nothing Else!
The analysis above highlights that we are in a rare regime when commodities are the only long asset with a positive trend. The last time this happened we entered a long period of high inflation and poor real returns. Will this happen again? Who knows. But we do know that post-1973 we entered a world where, for several decades (at least up to around 2007), both bonds and commodities were an important component of a diversified portfolio. The recent past has arguably made investors complacent in their reliance on a stock/bond portfolio as an end-all-be-all solution. When history tells us that incorporating commodities into a portfolio probably makes sense from a diversification standpoint.
DIY Asset Allocation Weights: August 2022
No exposure to domestic equities. No exposure to international equities. No exposure to REITs. Full exposure to commodities. No exposure to intermediate-term bonds.
Do Stocks Efficiently Predict Recessions?
I find that returns are predictably negative for several months after the onset of recessions, becoming high only thereafter. I identify business cycle turning points by estimating a state-space model using macroeconomic data. Conditioning on the business cycle further reveals that returns exhibit momentum in recessions, whereas in expansions they display the mild reversals expected from discount rate changes. A strategy exploiting this pattern produces positive alphas. Using analyst forecast data, I show that my findings are consistent with investors' slow reaction to recessions. When expected returns are negative, analysts are too optimistic and their downward expectation revisions are exceptionally high.
Relative Sentiment and Machine Learning for Tactical Asset Allocation: Out-of-Sample Results
We examine Sentix sentiment indices for use in tactical asset allocation. In particular, we construct monthly relative sentiment factors for the U.S., Europe, Japan, and Asia ex-Japan by taking the difference in 6-month economic expectations between each region's institutional and individual investors. These factors (along with one-month forward equity returns) then serve as inputs to a wide array of machine learning algorithms. Employing combinatorial cross-validation and adjusting for data snooping, we find relative sentiment factors have robust and significant predictive power in all four regions; that they surpass both standalone sentiment and time-series momentum in terms of informational content; and that they demonstrate the ability to identify the subsequent best- and worst-performing global equity markets from along a cross-section. The results are consistent with previous findings on relative sentiment, discovered using unrelated datasets.
Global Factor Performance: July 2022
Standardized Performance Factor Performance Factor Exposures Factor Premiums Factor Attribution Factor Data Downloads
DIY Asset Allocation Weights: July 2022
No exposure to domestic equities. No exposure to international equities. No exposure to REITs. Full exposure to commodities. No exposure to intermediate-term bonds.
Global Factor Performance: June 2022
The following factor performance modules have been updated on our Index website.[ref]free access for financial professionals[/ref]
DIY Asset Allocation Weights: June 2022
No exposure to domestic equities. No exposure to international equities. Half exposure to REITs. Full exposure to commodities. No exposure to intermediate-term bonds.
Value Investing: Headwinds, Tailwinds, and Variables
Investing is no different. A question we regularly get in the current environment is "How does inflation affect value stocks?" Well...it depends. I could show you some data on how value stocks did in the 70's (period of high inflation) versus how they did in the 90's (low inflation). But if WW3 broke out tomorrow, wouldn't that variable quickly top all other variables? Probably. So let's table that variable.
Global Factor Performance: May 2022
The following factor performance modules have been updated on our Index website.[ref]free access for financial professionals[/ref]
DIY Asset Allocation Weights: May 2022
Big changes this past month: Half exposure to domestic equities. No exposure to international equities. Half exposure to REITs. Full exposure to commodities. No exposure to intermediate-term bonds.
Global Factor Performance: April 2022
The following factor performance modules have been updated on our Index website.
Trend is Generally Your Friend…Unless You are a Bond Investor…
Do-It-Yourself tactical asset allocation weights for the Robust Asset Allocation Index are posted here. (Note: free registration required) Request a free account here if you want to access the site directly. If you are an [...]
Are Stock Market Bubbles Identifiable?
Robin Greenwood, Andrei Shleifer, and Yang You authors of the study “Bubbles for Fama”, published in the January 2019 issue of the Journal of Financial Economics evaluated Fama's claim that stock prices do not exhibit price bubbles. Based on a fixed threshold for the industry price increases (e.g., a 100 percent price run-up during two consecutive years) to filter their events and to analyze what happens afterward, they examined U.S. industry returns over the period 1926‒2014 (covering 40 episodes) and international sector returns (1985‒2014).
Can Investment Flows Affect Prices? Yep.
Traditional finance theory suggests that stocks prices always reflect their fair market values based on publicly available information. Or in academic parlance, the "semi-strong" form efficient markets hypothesis serves as the null. What are the implications of this hypothesis? Well, the hypothesis suggests that the only reason a stock price will move is due to a shift in fundamentals (either through a change in expected cash flows or via the discount rate). But what about supply and demand shifts?
Global Factor Performance: March 2022
Factor Updates for: Standardized Performance Factor Performance Factor Exposures Factor Premiums Factor Attribution Factor Data Downloads