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Expert Perspective

News, research and market insights from our team of experts.

Investment e.Perspective

Current Issue | April 27, 2017

As Goes January…?

By: Mark Green, CFA, Chief Investment Officer and Oxford Investment Fellow


Wow! What a way to start the New Year!? By some measures, this January has been the worst start of any year in the stock market. In Behavioral Finance, the January Effect is a market anomaly that typically leads to above average monthly returns. Not this time! A related concept is the January Barometer, which suggests that stock market performance in January predicts performance in future months – as January goes, so goes the rest of the year. A lot of research has gone into these and other Calendar Effects / Market Anomalies, including predictions related to sports, politics and fashion. Seriously. An AFC win in the Super Bowl typically coincides with weak stock prices, the fourth year of a presidential election cycle is typically weak for stocks, and rising hemlines often coincide with rising stock prices. The upshot of the research suggests that while there may be some truth to these market anomalies, the theory of the Limits to Arbitrage makes it impossible to systematically capitalize on them. So, there you have it. Regardless of your own superstitions, we are off to a strange start for 2016.

In many respects, the recent market turmoil is a continuation of trends that began in 2015. In fact, most equity indexes actually peaked back in the spring and have been trending sideways-to-lower for the better part of the year. Take the S&P 500 Index in the US, for example. Following its peak in May the index went sideways through much of the summer before falling sharply in late-August. It saw some recovery in the fourth quarter, nearly reaching its previous high, but has since fallen to a new low (for now?) in late January. Peak-to-trough, the index has fallen about 10%, enough to call it a "correction." We've written a lot about our concerns regarding the global equity markets in recent quarters and have consistently recommended a defensive posture. While we are not surprised by recent market action, labeling it a correction may be merely putting a happy face on it.

As my colleague Bob Schaefer discusses in another Investment e.Perspective article this month, we are experiencing something of a "stealth bear" market in the US and an outright bear market in other parts of the world. For example, the MSCI EAFE Index of developed market international stocks is down 20% from its peak, just qualifying for the Bear label. The MSCI Emerging Markets Index is deep into bear market territory, down 33% from its peak. China is down nearly 50%. Even in the US, certain sectors of the market are under intense pressure: utilities, often a proxy for the bond market, are down 12%; financials, down 15%; REITs, an income play that has finally cracked, are also down 15%; natural resources are down nearly 40% from the spring of 2014 and even more from the 2011 high; the Alerian index of Master Limited Partnerships, another long-time favorite of yield-oriented investors, is down a stunning 55% since August of 2014. Stealth bear market, indeed. I encourage you to read Bob's article for more details and insight into our outlook.

Amid the carnage in the equity market, however, we do believe there are some opportunities for long-term investors. Bob outlines some of these in his piece. Lest people think we spend all our time glued to a Bloomberg terminal, however, in another article Brendan O'Sullivan-Hale describes a recent trip evaluating opportunities in frontier markets. We have made a significant commitment to who we believe is the premier manager in this space as part of our recommended international equity allocation. Even more than the emerging markets, the frontier markets are highly fragmented and extremely opportunistic. This is not a strategy you should access using a passive index. It takes on-the-ground research, looking company-by-company. Some of that ground is in places that may feel uncomfortable. I found Brendan's experience to be fascinating.

P.S. Calendar effects aside, I confess a certain "fan loyalty" to Peyton Manning and can't help but root for an AFC victory on February 7.

The above article represents the opinions of the author as of 1.28.16 and is subject to change at any time due to market or economic conditions or other factors.