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Jurrien Timmer

11 May, 9 tweets, 2 min read

They’re baaaack: The “sell in May” crowd is motivated by the stock market’s tendency to produce the best returns from mid-October through May and the worst returns during the summer and early fall. Here's how that strategy has fared since 1970. (THREAD/1)

Over the past 50 years, the indicator has worked quite well (before accounting for transaction costs, taxes and turnover, all of which could be formidable). The table below (left) shows the data. /2

Since 1970, the SPX has produced a CAGR of 10.84% against a volatility of 14.1, in the process producing a Sharpe Ratio of 1.14. The batting average was 64%. But SPX/cash, stocks/bonds and SPX/UTL all did better than that. /3

Just switching from a broad equity basket to a conservative one during the May-October period would have generated 175 bps per year of alpha. That's why the indicator is trotted out every May. But, as always, context is key, so let's dig deeper. /4

For the past 10 years, sell-in-May hasn't worked so well. Why? The past decade has been part of a secular bull market. Those still have seasonality and corrections, but they tend to be less pronounced. /5

When looking at the 50-year history, consider that much of the alpha of switching out of stocks in May happened when the stocks/bonds correlation was deeply negative. I am referring to the 2000-02 dot-com bear market and the 2007-09 global financial crisis. /6

The chart below illustrates this. Instead of a time scale, it shows the SPX as a scatter plot against itself (i.e. a perfectly linear slope of 1.0). Overlaid are the results of the SPX/cash and SPX/Agg strategies (SPX/UTL looks similar to the SPX/Agg, so I left it out). /7

See how the lines travel relative to each other? The SPX/cash line is mostly the same as the SPX line, except for the break around two thirds of the way. That break includes both the 2000-02 and 2007-09 bear markets. The same applies to the SPX/Agg line. /8

In other words, nearly all the success for sell-in-May stemmed from just two episodes. Most of the time, sell-in-May is an expensive insurance policy (especially tax-wise) that produces little payoff and that doesn’t work during secular bull markets. /END

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More from @TimmerFidelity

Jurrien Timmer

@TimmerFidelity

13 May

Predicting inflation trends isn't simple these days. Before this century, whenever the money supply soared, inflation tended to follow. However, the pattern hasn’t continued since the 2000s. (THREAD/1)

Why doesn’t inflation always track with money supply anymore? Demographics. Whatever inflation seeds are being sown by policy makers need to overcome powerful demographics-induced deflationary forces. /2

Here’s the same chart with the growth rate of the US labor force added in the bottom panel. See a pattern? When money growth was rampant during the '70s, the labor force was growing. Now money supply is growing fast again, but labor force growth is declining. /3

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Jurrien Timmer

@TimmerFidelity

12 May

The cyclical inflation we are seeing in the economy now is causing commodities to soar, as this chart shows: (THREAD/1)

The new bull market for commodities appears to come at the exact right time from a long-term, super-cycle perspective. The low in the Commodity Research Bureau (CRB) Index last year was perfectly timed in terms of the long cycle. /2

Will it last? The commodity super-cycle chart above certainly suggests so. And when we consider the current fiscal/monetary environment, we can imagine why this could go on. /3

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Jurrien Timmer

@TimmerFidelity

12 May

What next for inflation? Key question. Inflation drives correlation between stocks & bonds. This chart shows the 10-year annualized inflation rate on the horizontal axis & the 5-year correlation between the S&P 500 and the Barclays LT Govt bond index on the vertical. (THREAD/1)

For the past 20 years or so, inflation has been in the sweet spot to produce the most negative correlation possible, which in turn has made the 60/40 portfolio model so successful. /2

However: Since 1900, whenever the long-term inflation rate was above average, the correlation has almost always been positive. A traditional 60/40 model (SPX/Agg) was not the ideal mix during those times. Cash and gold were better for diversification than long bonds. /3

Read 4 tweets

Jurrien Timmer

@TimmerFidelity

29 Apr

If the pace of improvement for the economy has topped out and further gains will come at a slower pace—if we have reached "peak reopening" in other words—how might the markets react? Let's break it down: THREAD/1

If the current cycle mirrors what happened in 2010 and 1943—and I see many similarities—I wouldn't be surprised by a 10-15% correction in the market, as well as a counter-rotation back into the big growers. /2

Look at the spread between the percentage of Russell 2000 stocks trading above their 50-day average vs. the same for the S&P 500. Something broke for small caps a few weeks ago, right when the Weekly Economic Index reached its peak rate of change. /3

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Jurrien Timmer

@TimmerFidelity

28 Apr

The U.S. economy is rapidly reopening from lockdowns, which is great news, especially since China and other Asian countries reopened a while ago. But, how much of this has already been discounted by the markets? THREAD/1

My sense is that we have reached "peak reopening" and that markets already have priced it in. As you see here, the Federal Reserve Bank of New York’s weekly economic index (WEI) is still rising, but at a slower rate. /2

As the previous chart shows, it was exactly a year ago that the rate of change in the WEI bottomed out. This was the very same week that the stock market bottomed out, too. It’s always about the rate of change. /3

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Jurrien Timmer

@TimmerFidelity

22 Apr

Peak reopening? If the acceleration rate of the economy's reopening has peaked, it makes sense for the style rotation of stocks to take a rest, and for bonds to find a bid. Lately, 10-year Treasuries are down 18 basis points from their high of 1.75%. THREAD/1

With upward momentum for yields broken, German and Japanese investors may feel more comfortable nibbling at U.S. bonds and hedging them back into euros and yen. It’s a far cry from 2019 when these investors had to give up yield to buy treasuries on a hedged basis. /2

Will yields eventually resume their uptrend and head to 2% and beyond? It’s possible, especially if you expect that inflation will eventually be making a secular comeback. The chart below of the money supply certainly seems to suggest it. /3

Read 4 tweets

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