Asset Classes Growth Probabilities

by: Lowell Herr

Which asset classes provide the best probabilities for growth over the next six to twelve months? One of two ways to answer this question is to examine the "Delta Factor" for the "Big Six" U.S. Equity asset classes plus domestic REITs, international REITs, developed international markets, emerging markets, and commodities. Bonds do not inter into this analysis.

In the following screen shot you will note which classes show a Buy under the "Delta Factor" column.

A few explanations are in order as to the assumptions I used. The time frame is four years and the projected return was set to 7.0%. That is likely too high, but that assumption will not impact the Delta Factor projections. The reference index for coming up with Delta Factor is VFINX or the S&P 500.

I substituted some iShare ETFs for Vanguard ETFs as they have a longer historical record. For example, I am using IJJ instead of VOE and EFA instead of VEU. The results are similar.

It probably comes as no surprise that the developed and emerging markets show up quite well going into the future. After all, those are asset classes that have lagged as one can see from the StockChart graphs. I included both IGE and DJP for commodities. Those also look strong going forward.

If you come back to this blog post in a year and click on StockCharts, one might see a very different picture from what shows up Friday morning 9 December 2011. At least we hope the outlook will be much better.

The "Delta Factor" is a reversion-to-the-mean sort of analysis. In other words, a Buy signal shows up when the outlook looks bleak. As mentioned before, the signals tend to be early in the game. In other words, it may be two or three months before EFA, VWO, and RWX hit bottom, but one will not likely go wrong by beginning to nibble away at making some purchases. RWX and VWO are commission free with TDAmeritrade so picking up 5 to 25 shares per week is not going to break one up with commissions. I don't know if EFA is a commission free ETF, but one can easily look it up. IGE is not commission free.

Click to enlarge