Industry Groups All Rise (and Will Fall) on the Same Monetary Tide
Two surprising observations about the groups affected by recent monetary events.
Let’s ignore the amorality of that document and keep in mind that it went on for about seventeen pages. That is short by the standards of other works of fiction and way too long for useful investment advice. It also succumbed to the fallacy central to today’s discussion: For every external action, there are distinct investment reactions for you, some of which might – and this will surprise you – generate fees and commissions.
Two Major Monetary Events
One of the upsides of being a macro analyst these days is that the world’s policymakers keep giving you things to do. If it is not QE-this, it is Twist-that. It gives us a lot of things to compare before-and-after. Let’s take two major monetary events of recent years -- the inception of Operation Twist in August 2011 and the downside breakout of the Japanese yen beginning in November 2012 -- and pose the statistical question of which industry groups’ returns were different from the S&P 1500 Supercomposite’s returns at even a 66.67% probability (2:1 odds).
The answers are surprising on two levels. First, only a small number of groups are affected significantly by major events. Second, the groups involved have little if any sectoral theme.
Let’s take the Twist period first. Of the 144 industry groups examined, only eight groups accounting for 3.6% of market capitalization had returns statistically different returns from the S&P 1500's returns. While several of them, including homebuilders, diversified banks, and thrifts & mortgages at least have a housing-related theme, the others are unrelated. I would like to create a link between distillers & vintners and computers & electronics retailers, but I cannot.
The shorter time period from November 2012 should allow for more differentiation, and it does. Here, 12 groups accounting for 7.4% of market capitalization pass the 2:1 odds test. One of them is something called “multi-sector holdings,” which is a one-company group consisting of Leucadia National (NYSE:LUK). Another is gold, which is Newmont Mining (NYSE:NEM) and Royal Gold (NASDAQ:RGLD). The rest of the set is simply another motley collection of unrelated entities.
You will never, and I do mean never, find someone who will tell you in advance that a major policy change involving massive manipulation of the US yield curve or the willful debasement of a key currency will have only a trivial effect on the distribution of industry group relative returns. The temptation to show how clever you are by recommending portfolio shuffling is extreme; conversely, saying something to the effect of, “They are going to print money in Biblical-sized quantities? Cool; just buy everything you can get your hands on and then some,” sounds unsophisticated and even flippant.
However, it is and has been true for these events and others similar to them. The simple fact of the matter is that a rising monetary tide lifts all of the industry group boats more or less equally. Unfortunately, that lesson will also apply for when they remove the stopper from the monetary bathtub, too.
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