Let’s Hear It For The Pork
In 2018, investors saw the markets worldwide come under pressure, with over 90% of major asset classes down for the year. The S&P 500 was down nearly 5%, and bonds barely squeaked out positive performance at .01%. By contrast, this year has seen almost the exact opposite move with most markets up substantially. The S&P 500 is up over 23% year to date as the U.S. job market continues to set new records for unemployment levels while the Federal Reserve continues to lower short-term interest in an attempt to keep the economy moving forward. Many pundits point to the positive movement on the trade war with China as a proximal cause for the recent rally in markets. However, I may have stumbled onto the real reason why markets have experienced such a boost this year, and it has everything to do with China, and nothing to do with trade.
For those familiar with the signs of the zodiac, let me introduce you to the Chinese lunar calendar. It seems that some astute Wall Street analysts appear to have cracked the code to market riches. Many have been left wondering how this year could have been so strong in most widely followed assets classes, and these guys seemed to have figured it out for us. Investors are enjoying a robust market this year because we are currently living in a Pig year, which, according to the data, is historically the strongest year for U.S. stock market returns.
So with the year of the pig nearly in the books, should investors be looking ahead to a worse year of U.S. stock market performance in 2020, the year of the rat?
Obviously not. Other than just being clickbait for eyeballs on the internet, I am not sure what if anything an investor can take from the above research. While the data goes back to 1928 when broken into 12 components, the size of the data limits is drastically reduced, and our ability to have confidence in the numbers that they are producing diminishes alongside it. Discerning anything actionable would be similar to trying to project stock market performance based on who wins the college football championship this year. There is just a limited data set that spans over generations. The University of Minnesota won their titles eighty years ago (1934-1936,1940-1941), so by extension, does that mean the next time they win, the U.S. be in another Great Depression? It’s certainly not something that I would bet on with my investment dollars. The U.S. stock market might do better or worse next year than it has this year, but it will have nothing to do with the fact that it will be the year of the rat.
Rather than focus on spurious statistics, investors can look to the Nobel prize-winning research that has been conducted over decades that has been proven to be statistically significant in finding the factors that drive an excess returns. These factors are persistent across all markets, pervasive, and cost-effective to capture. These factors are as follows:
*Equity-Stocks outperform bonds
*Size-Small companies perform better than large companies
*Price-Value stocks perform better than growth stocks
*Profitability-More profitable companies perform better than less profitable companies
Statistics will always be around, and if taken in the right context, are fun to read. Investors that maintain focus on investing in funds that have decades of sound academic research built into their construction will be better served than those that are worrying or making long-term portfolio decisions based on dubious correlations no matter how they are presented.