2014 Review: Asset Classes & Bonds (01/09/2015)

Continuing with the 2014 year-in-review series, I am going to take a look at broad asset classes in this post. Similar to 2013, domestic stocks were best performers (Exhibit 1). The dollar also had a great year with a steep advance starting in late June. Most of the fixed income investments had a decent year, while foreign stocks lagged once again. Commodities overall and crude oil in particular had a horrible year!

Exhibit 1 – 2014 Performance for Major Categories


Digging a little deeper into domestic stock market, Large Caps (particularly growth) had a great year (Exhibit 2). Midcap did ok (especially on the value side), while small companies lagged significantly. In fact, as late as December 16, Russell 2000 ETF (IWM) was negative for the year and was saved by a 6% rally in the last two weeks.

Exhibit 2 – 2014 Style Box Performance


Switching gears to fixed income, there was somewhat of a reversal of fortunes – Treasuries and Munis that got hammered in 2013 had a big rebound which came as a surprise to most (Exhibit 3). High Yield didn’t have a good year, driven by a large energy weight in the index. As oil prices took a dive in the second half of the year, stocks AND bonds (most of which are junk) of energy companies followed. International bonds came in negative but that can largely be attributed to the strong dollar. Vanguard’s BNDX which hedged its currency exposure had a pretty decent return of 8.7%.

Exhibit 3 – 2014 Performance by Fixed Income Groups


In the next post, I will take a closer look at sector performance in 2014.


2014 Review: Significant Events (01/05/2015)

It was another good year for the U.S. stocks with S&P 500 rising 11.4% (price-only, or 13.7% including dividends). Once more, it was a case of “climbing the wall of worry” for the market. A short list of scary headlines included VA hospital scandal, Ukraine conflict (including shot down Malaysia Air plane), child migrant crisis in the U.S. (and many migrant sea incidents in Europe), Israel/Gaza conflict, ISIS, Ebola, ending QE, Bill Gross leaving PIMCO, Scotland independence referendum, big oil price drop, meltdown of the Russian economy, racial tensions after Fergusson, North Korea (allegedly) hacking Sony, etc.

Exhibit 1 shows the weekly % changes in the S&P (green and red bars) and the level of the index (black line).  The annotations are the major stories of the year that affected the markets.  It’s not meant to be a comprehensive list, just my personal observations.

Exhibit 1 – 2014 S&P 500 Timeline


Despite a respectable end result, the market did have a few decent pullback during the year (Exhibit 2). The worst one came in October, just before the midterm elections. S&P almost hit the 10% threshold typically considered a correction, but not quite. So the streak continues with no meaningful correction seen since August 2011 (driven by debt ceiling fight and subsequent downgrade of the U.S. credit rating).

Exhibit 2 – S&P 500 Pullbacks in 2014 (intraday basis)


The year started off on a negative note, but weak January was followed by five positive months in a row (Exhibit 3). February, August and November were the strongest months. Interestingly, despite historically being the strongest month (September & Seasonality – Silly or Smart?), December turned in a negative return driven by high volatility in the oil/energy sector and the related economic turmoil in Russia.

Exhibit 3 –S&P 500 Monthly and Quarterly Performance in 2014


In the next post, I will take a closer look at the performance of other asset classes in 2014.

Population Trends III – Regional Differences (12/11/2014)

In the last two posts, we analyzed the global population growth and migration statistics at the country level. In part 3 of the series we’ll roll it up to the regional basis. Before we get into the numbers, I wanted to show how Worldbank breaks down their regions and which countries are the main drivers for each group. Exhibit 1 shows top 10 countries for each WB region and their 2013 population. That will come in as a handy reference when you try to picture the broad trends in the tables below.

Exhibit 1 – Top 10 Countries by Region with 2013 Population (millions)


Exhibit 2 shows regional growth over the past 10 and 20 years. Populations of Africa, Middle East and South Asia increased quite a bit. More developed regions were fairly stagnant with Europe only growing 5% over 20 years! Another way to slice it is by income level – basically the lower the income the faster the population growth. Hopefully, their income catches up to us before their massive populations decide to do something drastic about this lopsided wealth distribution!

Exhibit 2 – Population Growth by Region (Sorted by 20 Yr % Chg)


Exhibit 3 looks at the same groups from migration perspective (2012 is the base year here as those are the latest available migration numbers). In the past 10 years almost 33 million people moved between various regions. As one would expect, people moved to Europe, North America and to a smaller extent Middle East from the less developed locales. On the income segmentation, 41.4 million people moved from lower income countries to the high Income ones. So economic migration is alive and well as people continue to seek better lives for themselves and their families. Yet, migration out only offset a very small percentage of the 752 million(!) natural population growth in those low and mid income segments.

Exhibit 3 – Migration Trends by Region (Sorted by Net Migration in Millions)


Again, there is no immediately actionable advice here, but over time these sorts of global trends shape the investment landscape.

Population Trends II – Moving All Around (11/20/2014)

In part 2 of the global population series we’ll take a look at the effect of migration between countries. Exhibit 1 shows migration stats for the largest 43 countries in the world. The latest available migration data is for 2012, so we’ll cover 10 years from 2002 to 2012. The table separates “Net Migration” (in millions) from total population change and thus “Natural Growth”. We then calculate both of those numbers as a percent of starting population. For example, 5.3 million Indians moved out of the country, but that number was dwarfed by the natural (births minus deaths) growth of 165.3 million! In relative terms, only 0.5% of the 2002 population left, while natural growth rate was 15.3%.

Exhibit 1 – Last 10 Years Migration Statistics for Countries >30 Million


Let’s re-sort the same table to see who are the biggest migration gainers and losers in absolute number of people (Exhibit 2). United States had net immigration of 10.2 million people over the last ten years. And this is only official legal immigrants that doesn’t include an estimated 12 million illegals! Regardless of your political persuasion, it’s clear that immigration reform is sorely needed in this country.

Surprisingly, the next country on the list if Russia with 3.4 million. Being a Russian emigrant myself, I find this number very interesting and I will address it in the next table. Natural demographic forces still overpower the strong inflow of immigrants leading to declining total population there. The rest of the list is mostly comprised of Western European countries (and Canada).

Exhibit 2 – Absolute Migration Top 10 Gainers and Losers for Countries >30 Million


Now, all of the above tables only show largest countries with population of 30 million plus. If we include smaller nations, the things look quite different. Exhibit 3 sorts all countries by migration as % of 2002 population.

All top five gainers are wealthy Gulf nations importing “guest workers” (more like “slave” labor) from South Asia (see Bangladesh, India, Pakistan in Exhibit 2). As an extreme example, Qatar had population of only 600,000 in 2002 yet 1.4 million people migrated there in the last 10 years for an astonishing migration percentage of 215%. Many of these “guests” are working on infrastructure projects for the FIFA 2022 World Cup, which has been quite controversial and might be cancelled altogether. If you like complaining about your job or just want a guilt trip, read this Washington Post article.

A lot of the net losers are violence-plagued nations all around the world. And many of the former Soviet republics on the list account for movement of ethnic Russians back to the motherland that surprised me before.

Exhibit 3 – % Migration For ALL Countries – Top and Bottom 20


Not sure if there is any sage investment advice to be gleaned here but it’s still pretty interesting stuff! Next time we’ll roll some of these numbers up by region and income levels.

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)


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 %


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


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


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


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



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).

September & Seasonality – Silly or Smart? (9/11/2014)

The first week of September brought about incessant chatter of a period of bad seasonality in the market. There were countless media reports, blog posts and CNBC segments all touting that September is “the worst month”. So I decided to take a look at the numbers and provide my take on (un)importance of seasonal patterns in investing.

First, let’s define what “seasonality” is in the stock market. Investopedia defines it as “A characteristic of a time series in which the data experiences regular and predictable changes which recur every calendar year.” So basically, it’s a tendency of the market to act a certain way in any given time period. ON AVERAGE (this is the important part).

Some professional investors (particularly traders) pay close attention to these patterns. Stock Trader’s Almanac is a very popular desk reference book on seasonality (I have one but don’t look at it much). There is even a mutual fund that trades based on seasonality – Probabilities Fund A (PROAX) (I do not recommend it).

So what does monthly seasonality looks like? Exhibit 1 shows average monthly returns for S&P 500 and percent of time they were positive. Sure enough, September is the worst month with average loss of -0.5% and only 45% positive performance. December, on the other hand, is by far the best month to be in stocks.

It’s also clear that there is solid evidence behind the Best Six Months strategy (November – April). Although the other six months average much lower return, I still don’t see why you would “Sell in May and Go Away” if you can still make 1.5%? It might make more sense in more normal interest rate environments when you could make more than that on a 6-month CD and avoid equity risk.

Exhibit 1 – S&P 500 Monthly Seasonality Since 1950 (price only)


Ok, so you should short the market every year on September 1st, right? Not so fast – let’s take a look at September returns for each year going back to 1950 (Exhibit 2). Top and bottom 5 are highlighted in green and orange, respectively. So if you get out of stocks (or even short them), you might miss out on some decent returns including 4 of the last 5 years and 8 of the last 10. Clearly, “every calendar year” part doesn’t seem to apply here.

Exhibit 2 – September S&P 500 Returns (price only)


Moreover, exact timing of your trades gets even more tricky. Josh Brown had a post last week on September performance patterns: Charting the Average September Stock Market. It shows that on average first couple weeks of the month actually tend to be quite good and the drop starts around the 16th.


It is true that September has the worst record of the 12 months. However, it does not mean that you should sell your investments each year on August 31st! If anything, it might be a good time to invest some extra cash just in time to enjoy the seasonal run-up into year-end and up to April.

Seasonality has its place and can be a useful tool. Be that as it may, I would recommend using it as just one of the data points you look at to guide your investment strategy.