The Fed Model

The US stock market keeps pushing higher despite recessionary warnings. S&P 500 Index earnings for the most recent quarter are estimated to have risen, albeit at a slower pace than stock prices. As a result, valuations rose, with the P/E estimated at 24.43. 1 On the other hand, U.S. Treasury bond yields reached levels not seen in more than 10 years following the current Fed’s rate hike campaign. This comeback of the bonds challenges the former environment of TINA (there is no alternative – to stocks) to mutate to TARA (there are reasonable alternatives).

June 16, 2023

Bulls vs. Bears: An History of S&P 500® Bull and Bear Markets

The S&P 500® Index entered a bull market just last Thursday. It seems that neither the gloomy economic sentiment nor the Fed’s rate hike campaign can slow the bull’s rage, as the market is currently more than 20% above the lows of last October. Once again, some people are starting to call this the most hated Bull Market rally. Realistically, this is just another case of investor’s myopic behavior, as most previous rallies have been deemed “hated” at some point.

June 8, 2023

Diversification Part II: An Analysis of the S&P 500 Index Effective Number of Stocks

Diversification is one of the most important rules of investing and sometimes investors believe their allocations are more diversified than they are. In the previous article, I introduced the topic of diversification using the top 10 largest stocks in the S&P 500® Index. Now I will introduce a more formal measure of concentration risk, the effective number of stocks, and examine its historical evolution. In addition, this article will present an index weighting method that is an alternative to market capitalization to reduce concentration risk.

May 29, 2023

Diversification Part I: An Analysis of the S&P 500 Index Top 10 Holdings

Diversification is the number one rule of portfolio management for many investors. Ray Dalio goes even further calling it the Holy Grail of investing. Colloquially, this is expressed by the idiom “do not put all your eggs in one basket”. In the stock market, this year’s returns in the S&P 500® Index appear to have been concentrated in the stocks with the highest market capitalization. Consequently, these stocks exhibit a higher weight in the index, making it more concentrated, which is contrary to the diversification objective.

May 22, 2023

Periods When to Make Money

Recently, a publication has been circulating with the title “Periods When to Make Money”. It alludes to the fact that 2023 is tagged as a year “when to make money,” which is why people are extremely excited about it (and repost it on social media). This is especially interesting when you consider that the S&P 500 Index is 9.6% up on a YTD basis. 1 In this article, I will analyze how well these predictions have worked in past cycles.