John Gorlow
| Jun 07, 2013
May Review
The S&P 500 Index returned 2.34% in May, its seventh straight month of gains. Year-to-date, the index has returned 15.37%, its best five-month start to a year since 1997. The market’s advance this year has come largely on supportive monetary policies from central banks around the world.
In May, the MSCI International Developed Index declined 2.93%, as 7 markets gained and 19 markets declined. Surprisingly, Greece performed the best and added 3.67%. The MSCI Emerging Market Index lost 2.94% and is off 3.89% YTD compared to a 6.12% YTD gain for the International Developed markets.
Within fixed income, May started poorly and only got worse. The S&P 7 – 10 Year U.S. Treasury Bond Index closed the month with a negative 3.05% return. The S&P U.S. Investment Grade Corporate Bond Index followed treasury bonds down, falling 2.24%. A strong dollar in addition to rising rates took their toll on international indices. The S&P/Citigroup International Treasury Bond Ex-U.S. Index fell 3.75% and finished down 4.18% YTD. International corporates did not fare any better, as the S&P International Corporate Bond Index fell 3.31% for the month. The DJ-UBS Commodity Index fell 2.2%, bringing the index’s YTD total return down to -6.0%. Meanwhile, DJ-UBS Precious Metals lost 6.1%.
Of Slippery Slopes
A recent New York Times article cited David Leinweber’s research at Caltech that used only three variables to predict 99% of the fluctuations in the stock market. These variables include butter production and sheep populations in the U.S. and Bangladesh, and U.S. cheese production. Imagine how much money you could make with this information if it had any predictive value. While some data manipulations might be interesting to talk about, they are not to be misinterpreted for a sound investment strategy.
Stock market analysts will mine data until they find what they think is a pattern. They want you to believe the pattern has predictive value, but every time a pattern shows up in the data, it eventually goes away. The only pattern that matters to your investment success is your behavior: namely, exercising discipline when your emotions threaten to steer you off course. Butter in Bangladesh can be a slippery slope.