A Santa Clause Rally?

The S&P 500 is up more than 3% this week, leading the talking heads on TV to once again declare that a “Santa Clause Rally” is unfolding. It may seem kind of silly to hear professional investors talk in such terms, but December has historically been the best month for stocks.

A Mystery Solved: The Case of the Sharpe Ratio

In the December Journal of Financial Planning, Michael Kitces, Sauro Locatelli, and I published a study entitled, “Improving Risk-Adjusted Returns Using Tactical Asset Allocation Strategies.” The title is a mouthful, but we were basically asking if changing the asset allocation of a portfolio can increase your returns relative to the amount of risk that you take, compared to just buying and holding stocks in your portfolio. Around here we call changing the asset allocation “tactical asset allocation.”

Our Journal of Financial Planning Study, Translated into English

Readers who visit the Pinnacle Advisory Group website (pagmain.wpengine.com) will note that a paper by Solow, Kitces, and Locatelli, entitled “Improving Risk Adjusted Returns Using Market-Valuation-Based Tactical Asset Allocation Strategies,” was published in the December issue of the Journal of Financial Planning (JFP) – the most distinguished journal in the profession. The paper itself is a technical study that may be difficult to read, so this summary is intended for those who might not care to wade through the academic and statistical details. The basic conclusion of the paper was this: By reducing exposure to stocks when their prices are excessive relative to the profits they produce and increasing exposure to stocks when prices are low relative to their earnings, it is possible to systematically improve long-term returns.

The Great Decoupling Myth

Recently U.S. data has taken a more positive tone as international data continues to get softer. Thursday’s U.S. data brought a very strong number on jobless claims, along with two regional manufacturing surveys that were better than expected. Industrial production numbers were weak, but on balance more data beat estimates than missed, and that’s been the pattern for the last few months. Meanwhile Europe continues to deteriorate and the numerical trends are worrisome. At this point it would seem a European recession is a foregone conclusion, and the only question left to argue about is whether the recession will be mild, average or severe. In Asia things are cooling fast as well, and many leading indices are falling. The positive spin is that the emerging world is now cutting rates; on the other hand, they are not cutting them fast enough, nor with sufficient magnitude. Overall the international data is far weaker than that of the U.S., which makes for a mixed and confusing landscape.