Monthly Archives: October 2014

Population Trends I – Large vs. Fast (10/29/2014)

World news is dominated by scary headlines: Ebola, Ukraine, ISIS, Arab Spring aftermath and the list goes on. It all got me thinking about what the current world population dynamics look like. Worldbank has a ton of figures available online so instead of throwing 50 dense tables into one gigantic post, I’m going to do a series of short ones. Over the next few weeks, I plan on taking a look at statistics that I personally find interesting and/or surprising.

To start with, let’s see what the world’s most populous nations today are and how fast they are growing. Exhibit 1 shows all countries with population over 30 million people as of 2013. China and India are at the top followed by the United States. After that the ranks are dominated by developing countries across all regions of the world. One surprising factoid for me was that U.S. outgrew China over the past 10 and 20 year. I guess population control policies there worked pretty well (maybe too well based on recent demographic issues).

Exhibit 1 – Countries >30 Million Ranked by Population (million)

21-1

Exhibit 2 shows the same set of countries, but this time ranked by 20-Year growth percentage. This version is dominated by African and Middle Eastern countries (many of which don’t particularly like us).

At the risk of sounding insensitive (which I’m not), it is amazing to me that the two countries that have been embroiled in war with the U.S. and intense internal strife are near the top of the list. Namely, Afghanistan and Iraq managed to grow their population 2.5 times faster than the world despite massive loss of life and significant emigration.

Canada, United States and other large developed countries are near the bottom of the list. Interestingly, former communist states share the basement with Germany and Japan. Demographics play important role in health of the national economies and potential investment returns. Countries like Germany and Japan have obviously figured this out long ago and today sport export-oriented economies.

Exhibit 2 – Countries >30 Million Ranked by 20-Year Growth %

21-2

All of these numbers represent total population changes that includes natural growth as well as migration. In the next post we’ll try to look at net migration and how it affect various countries.

Small Cap Omen? (10/9/2014)

There has been a lot of noise lately about small cap stocks underperforming their larger brethren. Sure enough, there is a perfect order to the hierarchy of returns on size ETFs in 2014 – the smaller they are the more they stink (Exhibit 1).

Exhibit 1 – YTD Performance by Market Cap

20-1

But just how unusual is that and what does it mean? Let’s look at historical performance patterns back to 1970 (Exhibit 2). Small caps had a period of massive outperformance from 1974 to 1983. Since then they have traded the lead back and forth. There are cyclical patterns that are obvious on the rolling performance charts below.

Exhibit 2 – Small Cap Relative to Large Cap

20-2

Breaking it down by decade (Exhibit 3) presents similarly mixed pattern. Small caps rocked it in 1970’s. They then did much better in the 2000’s as large companies worked off the tech bubble hangover. In the past 25 years (since 1990), the performance is exactly even albeit with slightly more volatility in the small cap.

Exhibit 3 – Average Returns by Decade

20-3

Ok, if these patterns are cyclical, can we make any predictions based on them? Exhibit 4 shows S&P 500 returns in the year following small cap underperformance of 5% or more. This metric “predicted” some of the biggest market drops including 2008 and 1974, but it “missed” several big ones. Furthermore, it also preceded some of the really good years for the S&P 500. In fact, the market was positive 71% of such years with an average return of 10%. Although, it should be noted that picking a random year since 1970 would have had a slightly better result.

Exhibit 4 – Market Returns After Years of Small Cap Underperformance

20-4

Conclusion

Like most things in the stock market, small cap underperformance is cyclical and quite common. There is no conclusive evidence that it has to lead to a big correction or end of the bull market. Perhaps the best we can say is: “2015 is likely to be a good year that is maybe possibly slightly less good than an average year”.

Data Note: Large Cap is represented by S&P 500, Small Cap is a spliced benchmark since Russell 2000 only goes back to 1980 (DFA US Small Cap Index 1970-1971, Ibbotson 1972-1979, Russell 2000 Index 1980-2014).