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Coming Off The Boil?

Danielle Park, CFA profile picture
Danielle Park, CFA


  • The tech-heavy NASDAQ index has lost lift relative to the older-economy Dow Jones Industrial Average since April 21.
  • Other recent risk-market leaders are also showing weakness.
  • The risk rally has had one hell of a run, but if "reopening" mania is finally coming off the boil, we should have another good opportunity to add some Treasuries.

The investor
Photo by Andrey Bukreev/iStock via Getty Images

A handful of the world's most expensive tech companies helped pushed US stock indices to record-high valuations this spring. However, as shown here since 1986 (courtesy of my partner Cory Venable), the tech-heavy NASDAQ index has

This article was written by

Danielle Park, CFA profile picture
Portfolio Manager, financial analyst, attorney, finance author, a regular guest on North American media. Danielle Park is the author of the best selling myth-busting book “Juggling Dynamite: An insider’s wisdom on money management, markets and wealth that lasts,” as well as a popular daily financial blog:www.jugglingdynamite.com Danielle worked as an attorney until 1997 when she was recruited to work for an international securities firm. A Chartered Financial Analyst (CFA), she now helps to manage millions for some of Canada's wealthiest families as a Portfolio Manager and analyst at the independent investment counsel firm she co-founded Venable Park Investment Counsel Inc. www.venablepark.com. For two decades, Danielle has been writing, speaking and educating industry professionals and investors on the risks and realities of investment behaviors. A member of the internationally recognized CFA Institute, Toronto Society of Financial Analysts, and the Law Society of Upper Canada. Danielle is also an avid health and fitness buff.

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Comments (7)

chuckmyd profile picture
Good stuff! Thoroughly enjoyed the article and observations.
Lake OZ boater profile picture
Good article, thanks!

Inflationary expectations are moderating. The US 30 year treasury peaked a while back around 2.45%. It's currently yielding around 2.25%.

Cleveland Fed uses a robust method for their inflation projects. Their current 10-year expected inflation projection is at 1.57%

Market Map profile picture
It can be tempting to extrapolate negative outcomes for an asset class by looking at visual depictions of price history ( charts ), recency of returns ( for example, Nasdaq composite annual returns 2017 = +28.2%, 2018 = -3.8%, 2019 = +35.2%, 2020 = +43.6% ). However, as success in investing involves the holding of equity assets for long(est) optimal periods, "success" being the math underlying the exponential growth of equity assets via the "compounding" of company earnings / dividend reinvestment, an investor may be best served by not "intervening" in this process out of fear or subjective rationalization, with the exception of an infrequent portfolio "rebalance".
In a constantly changing economic and technologically innovative world, equity related assets don't necessarily have to decline significantly ( on an annual basis ) in order to "reset" back to some arbitrary valuation level. History shows that prices may in fact "consolidate" a recent string of positive double digit years, by declining a modest amount ( such as the minus -3.8% in 2018, minus -1.8% in 2011, minus -3.2% in 1994, etc. ) or even produce a modest positive return for the year ( 1977, 1986, 2005 ).

For "accumulation" stage investing, a portfolio of companies representative of "water related" industries ( as "proxy" for an allocation of duration assets ), small cap value, and large cap "non financial growth ( Nasdaq 100 / QQQ ) has produced excess returns above benchmark since 1986 ( inception of NDX ) https://tinyurl.com/c39hr65k The water industry stocks have tended to "negatively correlate" to movements of the other two equity asset classes, a feature similar to that which duration assets have provided. Small cap value has robust evidence of producing "highest" excess returns of all equity factors, and the Nasadq 100 also has a proven, 35 year track record of performance.

A decent, simple arithmetic and data driven method towards identifying periods when the odds of equity assets having produced a "significant" decline were high, has involved the use of a simple observation of the SP500 price in relation to its "moving average", and where this lies within the continuum of the four year "Presidential term".

Using a measurement of market returns starting from the month of July, since 1933, some of the most negative 12 month market returns have been "July through June" periods commencing within "first" years of Presidential terms - this when the market "trend" was negative ( applying the SP price / moving average mentioned, ( Table 2 https://tinyurl.com/yyf48e4q )). Conversely, July through June periods commencing within "2nd" years of Presidential terms have produced some of the best forward 12 month returns ( Table 4 ). With this strategy, the "holding" of equity assets ( "offensive" portfolio allocation ) occurred over 85% of the 90 year historical sample, and the periods identified as "high risk" ( "defensive" allocation periods ) occurred 15% of the time ( Table 7 ).

At present, the SP 500 price resides "above" it's monthly basis moving average. So, with less than two months to go, a positive SP500 / moving average relationship into June 30th seems likely. And, as strategy conditions describe in the study, if the moving average configuration has been positive in June 30th of the 1st Presidential year, the market in the second and third Presidential term years, has a significant chance of producing positive returns also ( see Appendix, Table 1 ).

This table https://imgur.com/a/tYPOcnL provides a perspective on past three year returns of the SP500 and the portfolio of 3 asset classes mentioned when incorporating the strategy, with the 3rd Presidential term year June 30th market trend being "positive", these periods occurring over a variety of economic and geopolitical environments, inflation levels, Presidential administrations, etc.
@Market Map
Your comment is longer than the article...
arihalli profile picture
Thanks, as always, for your thoughts ...
cgougeon profile picture
Great article. I was hoping for some mention of the decrease in QE from BOC, and (lack?) of response from Cdn markets. I'm not hearing anything. Is it a non-event? No short-term impact, but long terms effects? On housing prices? I was happy to hear about it, just wondering if you have any thoughts.
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