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S&P's Stovall Says Better Off Rotating Than Retreating (Audio) · Bloomberg Intelligence

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  Speaker 1: on Katherine Cowdery. Technology and healthcare companies are dragging the
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  Speaker 1: That's your Bloomberg et Ever report. I'm Katherine Cowlery. This
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  Speaker 1: is taking stock with Kathleen Hayes and Pin Box on
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  Speaker 1: Bloomberg Radio. Sell in May and go away. Well, so
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  Speaker 1: far this year, if you invested in the S and
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  Speaker 1: P five hundred, you've made about nine tenths of a percent.
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  Speaker 1: Compare that to the Dow Jones industrial average, a gain
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  Speaker 1: of about two Here to tell us how to improve
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  Speaker 1: that performances. Sam Stobol is us equity strategist for SNP
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  Speaker 1: Capital i Q, and he is also the author of
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  Speaker 1: the book The Seven Rules of Wall Street. Sam Stobo
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  Speaker 1: always a pleasure. Hey, Pam, good to talk to you.
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  Speaker 1: Tell us about the SNP five and the selling May
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  Speaker 1: go away strategy. Well, obviously I've heard about the selling
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  Speaker 1: May ever since I've picked up my first copy of
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  Speaker 1: the Stock Traders Almanac, talking about how November through April
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  Speaker 1: was the strongest six month period of almost seven percent.
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  Speaker 1: It's going back to World War two, whereas May through
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  Speaker 1: October was the weakest six month period with an average
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  Speaker 1: increase of less than one and a half percent. But
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  Speaker 1: my thought was, well, g one and a half percent annualized,
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  Speaker 1: there is a lot better than you would get in cash.
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  Speaker 1: There must be a better way than actually selling in
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  Speaker 1: May and going away. And I actually own that you
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  Speaker 1: are better off rotating than you are retreating. Um. So
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  Speaker 1: I looked at five different strategies. Being in the market
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  Speaker 1: all year long, um being in stocks from November through April,
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  Speaker 1: but then selling and going into cash, being in the
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  Speaker 1: market November through April, but then being in the Barclays
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  Speaker 1: agg made through October, the SMP, low volatility, and just
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  Speaker 1: a second, when you talk about Barkley ZAG, I just
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  Speaker 1: want to make sure that we're talking about the Barkley's
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  Speaker 1: Aggregate Bond Index right, That is correct. So if an
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  Speaker 1: investor wanted to follow along with an e t F
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  Speaker 1: it would be a g G that would replicate that.
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  Speaker 1: And then finally you talked about the smart beta shift.
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  Speaker 1: I'll have to ask you about that. And then you
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  Speaker 1: said sector rotation. What what did you discover for strategy
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  Speaker 1: number one? The idea of staying the course. Staying the
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  Speaker 1: course was not as bad as you would think. The
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  Speaker 1: compound annual total return since was nine point nine um.
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  Speaker 1: You ended up getting your standard deviation of eighteen um.
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  Speaker 1: You had a very good year up thirty eight percent,
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  Speaker 1: and also a very bad year down thirty seven percent,
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  Speaker 1: being in two thousand and eight. So that was the benchmark,
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  Speaker 1: the hurdle against which the other strategies were measured. All right,
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  Speaker 1: tell us now about cashing out. Let's say you actually
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  Speaker 1: cashed out and sold everything in May and then we're
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  Speaker 1: fully invested from November the first of the following year. Well, indeed,
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  Speaker 1: you saw your volatility go down, the standard deviation went
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  Speaker 1: from eighteen down to ten and a half. Your worst
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  Speaker 1: year went from thirty minus thirty seven percent to minus
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  Speaker 1: ten percent. But you paid for it because instead of
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  Speaker 1: getting a nine point nine percent compound total return, you've
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  Speaker 1: got eight point nine percent. Uh. And so as a result. Yes,
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  Speaker 1: you you get for what what you pay for. And
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  Speaker 1: if you're looking for low volatility, then you took a
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  Speaker 1: lower return. So Sam, if you're planning to organize a
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  Speaker 1: Memorial Day holidaying, before you do so, you say, you
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  Speaker 1: know what I'm gonna put my cash, I'm gonna take
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  Speaker 1: it out of the stock market. I'm gonna put it
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  Speaker 1: in the Barkney's Aggregate Bond Index. How do you do? Then? Um?
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  Speaker 1: The Then actually the number start looking pretty good. The
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  Speaker 1: instead of nine point nine for the SMP all year long,
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  Speaker 1: you've got eleven point three percent. By engaging in this
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  Speaker 1: semi annual rotation, UM, you ended up seeing a fairly
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  Speaker 1: low volatility reading, going from eighteen down to twelve. Your
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  Speaker 1: worst year, instead of being minus thirty seven for the SMP,
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  Speaker 1: was minus fourteen. UM. But you still only beat the
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  Speaker 1: market percent of the time, so you still in a
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  Speaker 1: sense had a batting average that was less than fifty.
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  Speaker 1: All right, So we move on from the bond index
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  Speaker 1: to what is called smart beta. What is smart beta? Well,
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  Speaker 1: smart beta is when you engage in different screening technique
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  Speaker 1: to try to come up with returns that exceed that
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  Speaker 1: for the S and P file five hundred, while at
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  Speaker 1: the same time probably having lower volatility. Sp l V
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  Speaker 1: is the S and P five hundred Low Volatility Index,
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  Speaker 1: which contains the one hundred stocks with the lowest trailing
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  Speaker 1: twelve month volatility, and this grouping gets reviewed every quarter,
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  Speaker 1: so it in a sense is a defensive approach of
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  Speaker 1: owning equities. And by using that in place of bonds
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  Speaker 1: or cash in then May through October period, you ended
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  Speaker 1: up with a near twelve percent compound total return. You
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  Speaker 1: beat the market fifty six percent of the time. You
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  Speaker 1: still had lower volatility. Uh and instead of getting in
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  Speaker 1: minus thirty seven in two thousand and eight, you've got
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  Speaker 1: a minus twenty five, so second best but not the
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  Speaker 1: top of the heap. How about if you just let
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  Speaker 1: it rotate into such industry says Consumer Staples and Healthcare. Well,
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  Speaker 1: interestingly enough, I guess when the going gets tough, the
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  Speaker 1: tough go eating, smoking, and drinking, and if they overdo it,
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  Speaker 1: they have to go to the doctor. Works perfectly made
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  Speaker 1: through October because this rotationary strategy gained more than thirteen percent,
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  Speaker 1: It beat the market six of the time with also
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  Speaker 1: a very low standard deviation. And amazingly, this stock portfolio
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  Speaker 1: over the past twenty five years. Its worst year was
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  Speaker 1: two thousand and eight, down twenty one versus thirty seven
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  Speaker 1: for the stock market as a whole. What's the most
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  Speaker 1: efficient way to employ that strategy? It would be using
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  Speaker 1: UH the e t s of x LP for consumer staples,
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  Speaker 1: x l V for healthcare UH, and then using sp
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  Speaker 1: Y for the sm P five hundred. What's also interesting
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  Speaker 1: is that this selling may strategy rotating to different sectors
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  Speaker 1: is not only a good strategy for large tap stocks,
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  Speaker 1: but for the equal weight SMP five hundred the small
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  Speaker 1: cap six hundred UM. So you could look to those
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  Speaker 1: indices from Googgenheim as well as from power Shares UH
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  Speaker 1: to get the ticker symbols, and the rotation effect has
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  Speaker 1: a similar three to four hundred basis points about performance
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  Speaker 1: per year. We're speaking with Sam stoval. He is US
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  Speaker 1: equity strategist SMP A Global Market Intelligence also the author
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  Speaker 1: of the Seven Rules of Wall Street. Sam Stovall looking
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  Speaker 1: at the performance as we started this segment, looking at
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  Speaker 1: the SMP five hundred, a gain of nine tenths of
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  Speaker 1: a percent. If you've yet to hit your benchmark as
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  Speaker 1: an investment manager so far, this year. What are the
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  Speaker 1: chances do you believe that you'll actually accomplish that by
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  Speaker 1: the end of Well, I think this is definitely going
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  Speaker 1: to be a challenging year. It is the eighth year
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  Speaker 1: of this bull market since World War Two. What I
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  Speaker 1: did was I counted up the number of one percent
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  Speaker 1: days in counting in bullmarket years, and on average, we've
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  Speaker 1: got sixty five in the year that we just concluded, Well,
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  Speaker 1: we have eighty five to look forward to as the
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  Speaker 1: average for this year, so high volatility. I think we
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  Speaker 1: need to see an improvement in earnings expectations. We started
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  Speaker 1: the year thinking that the SMP would post a seven
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  Speaker 1: and a half percent increase in operating earnings. Now that
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  Speaker 1: estimate is less than one half of one percent, So
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  Speaker 1: I think things need to turn around. We need to
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  Speaker 1: see an improvement in the earnings projections because while inflation
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  Speaker 1: remains fairly low, valuations remain fairly high, and you can
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  Speaker 1: only have high valuations when inflation remains low and earnings
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  Speaker 1: are on the rise. Thank you very much. Sam Stovall
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  Speaker 1: is u S Secuity Strategist for SMP Global Market Intelligence,
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  Speaker 1: SMP Capital i Q, also the author of the Seven
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  Speaker 1: Rules of Wall Street. If you're listening to taking Stock
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  Speaker 1: on Bloomberg Radio, I'm pim Fox to take it through
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