Our Chief Investment Officer, Eric Cramer, gives a brief 2018 third quarter recap and an overview of the markets going into the fourth quarter for 2018.
Thanks for listening today. Please join us for one of several upcoming BIP 2018 Quarterly Market Report presentations.
QUARTERLY MARKET REPORT PRESENTATIONS
OCTOBER 23 AT 12:00 PM
NOVEMBER 1 AT 12:00 PM
NOVEMBER 8 AT 12:00 PM
OCTOBER 25 AT 12:00 PM
OCTOBER 30 AT 12:00 PM
NOVEMBER 7 AT 12:00 PM
NOVEMBER 13 AT 12:00 PM
QUARTERLY MARKET REPORT WEBINAR
Back before anyone had popularized the modern stock index it was very difficult to understand the historical path of the stock market. Increases and decreases in the prices of individual stocks could be charted, but observations about the behavior of the market as a whole were fraught with inaccuracies. It wasn’t until 1960, when an initial grant of $60,000 from Merrill Lynch, Pierce, Fenner & Smith was given to the University of Chicago’s Booth School of Business, that the work began on a database.
In 1964 the initial database was completed, and the Center for Research in Security Prices (CRSP) Master File became available to researchers. This was three years after President Kennedy proposed going to the moon, so it is truly a modern phenomenon. But much work was still needed to fill in some gaps in the file, such as in 1984 when the NASDAQ markets were added. Mutual fund prices were added later, as were Real Estate data, and it wasn’t until 2006 that the monthly stock market data from the years 1926 – 1962 was replaced with daily trading data.
It was at this point that various trading strategies could be back-tested for a full eight decades. Back testing is when an algorithm for trading stocks is applied in a computer model across the span of history to see how well a particular strategy would have worked out. It is a luxurious exercise for researchers and investors, since it has the ability to poke holes in many of the supposed bits of wisdom that have survived for nearly a century. For instance, the so-called “January Effect” that suggests better stock market performance in that month has been widely discredited.
But back-testing can also lead to some wishful thinking. If an algorithm says to sell all your stock market holdings when the technology sector exceeds a P/E ratio of 40, then you could probably show off a winning trading strategy through the dot-com bust time frame. But that strategy might not be of much use in the fuutre. Most of the leading online stock trading sites now offer the individual investor the tools to build their own trading strategies and back test them over some period of time. It’s what investors want, and it generates revenue, which is what capitalism is all about.
If you think this through it may become obvious after a while that any reliable method for beating the market this way (which is known as arbitrage) would start to influence stock prices. Investors would flock to the market in times when they were supposed to buy and would run away when it was time to sell. Eventually, this information would get priced into the market and the advantage would go away. Many investors believe the modern age of hedge funds and mutual funds has already done this, since those investing entities consist of large research teams with many more resources than the average day trader on his home computer could ever hope to muster.
However, there are some market phenomenon that do appear to be persistent over time. Please join us for one of our upcoming presentations when we will illustrate the short list of techniques that do appear to work over the entire history of the stock market. These techniques have historically led to returns that exceed the indexes, and are quantifiable and repeatable.
Thanks for listening today. This is Eric Cramer, Chief Investment Officer at BIP Wealth. Goodbye for now and I look forward to seeing you at one of our upcoming Quarterly Market Report lunches, or on the webcast.
Disclosure: This communication contains general investing information that is not suitable for everyone and is subject to change without notice. Past performance is no guarantee of future results and there is no guarantee that any views and opinions expressed will come to pass. The information contained herein should not be construed as personalized investment advice, tax advice, or financial planning advice, and should not be considered a solicitation to buy or sell any security. Investing in the stock market and the bond market involves gains and losses and may not be suitable for all investors. The Global Equity index is the MSCI ACWI IMI Index, which is a free float-adjusted market capitalization weighted global index selected as the best available proxy for a diversified stock portfolio consistent with modern portfolio theory. Approximately 55% of the index is comprised of the U.S. stock market and 45% is comprised of international stock markets, including both developed and emerging countries. The “Net Total Return” version of the index is reported here, which means the index reinvests dividends after the deduction of withholding taxes, using a tax rate applicable to non‐resident institutional investors who do not benefit from double taxation treaties. The Emerging Market index is the MSCI Emerging Markets Gross Index. The U.S. Fixed Income index is the Bloomberg Barclays Capital U.S. Aggregate Bond Index, which is a broad-based benchmark selected as the best available proxy for a high quality, diversified fixed income portfolio suitable for a U.S. investor. It is comprised of the Barclays Capital U.S. Government/Credit Bond Index, the Mortgage-Backed Securities Indices, and the Asset-Backed Securities Index. It is an unmanaged market value-weighted performance benchmark for investment-grade fixed-rate debt issues, with maturities of at least one year, and an outstanding par value of at least $100 million. The “Total Return” version of the index is reported here, which means that dividends are included and reinvested. The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange (NYSE) and the NASDAQ. It is not possible to invest directly in this or any other index.