WEBVTT - S&P's Stovall Says Better Off Rotating Than Retreating (Audio)

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<v Speaker 1>Global business news twenty four hours a day at Bloomberg

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<v Speaker 1>dot Com, the radio, plus Globo Last and on your radio.

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<v Speaker 1>This is a Bloomberg Business Flash from Bloomberg World Headquarters

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<v Speaker 1>on Katherine Cowdery. Technology and healthcare companies are dragging the

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<v Speaker 1>stock market. Lower losses over the past few days have

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<v Speaker 1>wiped out the Dow and SMP five hundreds gains from

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<v Speaker 1>earlier this month. Healthcare companies are declining after some week

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<v Speaker 1>earnings reports. The health ensure Molina Healthcare cut it's full

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<v Speaker 1>year guidance because of higher medical care costs in Ohio

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<v Speaker 1>and Texas and because of pharmacy costs. We check the

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<v Speaker 1>markets every fifteen minutes throughout the trading DAYWN Bloomberg Radio down.

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<v Speaker 1>Industrial leverage is currently down twenty seven points. It's narrowing

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<v Speaker 1>its earlier losses. That's an eighth of a percent down

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<v Speaker 1>right now, trading at seventeen thousand, eight hundred three, SMP

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<v Speaker 1>five hundred down seven points, a third of a percent

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<v Speaker 1>trading at two thousand, sixty eight, and then as DOC

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<v Speaker 1>is down twenty five points, that's a loss of half

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<v Speaker 1>a percent. Trading at forty seven seventy nine. West Texas

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<v Speaker 1>intermedi a crude holding study at forty six oh three

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<v Speaker 1>of barrel spot gold is up twenty eight dollars and

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<v Speaker 1>ounds at twelve and the tenure tragedy of one thirty

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<v Speaker 1>second yield one eight two percent. And that's a Bloomberg

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<v Speaker 1>business flash. Thank you very much, Catherine Calgary. It is

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<v Speaker 1>time now for the e t F report. It is

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<v Speaker 1>brought to you by Columbia University's Executive Technology Management Graduate Program,

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<v Speaker 1>which prepares technology professionals to drive business performance information at

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<v Speaker 1>SPS dot Columbia dot e d U slash tech. Let's

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<v Speaker 1>go to Catherine Calgary. The Bank of Japan's decision is

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<v Speaker 1>stan pat has reverberated an e t F that focus

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<v Speaker 1>on that country and its currency. The currency shares Japan's

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<v Speaker 1>end trust rallied three point three percent, while the Wisdom

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<v Speaker 1>Tree Japan Hedged Equity Fund dropped seven point six What

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<v Speaker 1>to do? Here's David Kotuk, chief investment officer of Cumberland Advisors.

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<v Speaker 1>I think Japan itself is a huge bullish stock market

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<v Speaker 1>story co tux. As Cumberland Advisers uses ets to invest

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<v Speaker 1>in Japan, we actually use five different ETFs to get

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<v Speaker 1>to various combinations of things in the Japanese market. Japan

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<v Speaker 1>is our largest overweight in the international et F strategy

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<v Speaker 1>we apply. Kotak and why he's optimistic about Japan's outlook.

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<v Speaker 1>I look at the Japanese market. I see an equity

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<v Speaker 1>risk premium double lad of the United States, with a

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<v Speaker 1>central bank that's stimulative, and with an economy that is

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<v Speaker 1>going to get an additional injection of defense spending. Ko

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<v Speaker 1>tax says defense spending in Japan could more than double.

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<v Speaker 1>That's your Bloomberg et Ever report. I'm Katherine Cowlery. This

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<v Speaker 1>is taking stock with Kathleen Hayes and Pin Box on

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<v Speaker 1>Bloomberg Radio. Sell in May and go away. Well, so

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<v Speaker 1>far this year, if you invested in the S and

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<v Speaker 1>P five hundred, you've made about nine tenths of a percent.

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<v Speaker 1>Compare that to the Dow Jones industrial average, a gain

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<v Speaker 1>of about two Here to tell us how to improve

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<v Speaker 1>that performances. Sam Stobol is us equity strategist for SNP

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<v Speaker 1>Capital i Q, and he is also the author of

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<v Speaker 1>the book The Seven Rules of Wall Street. Sam Stobo

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<v Speaker 1>always a pleasure. Hey, Pam, good to talk to you.

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<v Speaker 1>Tell us about the SNP five and the selling May

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<v Speaker 1>go away strategy. Well, obviously I've heard about the selling

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<v Speaker 1>May ever since I've picked up my first copy of

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<v Speaker 1>the Stock Traders Almanac, talking about how November through April

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<v Speaker 1>was the strongest six month period of almost seven percent.

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<v Speaker 1>It's going back to World War two, whereas May through

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<v Speaker 1>October was the weakest six month period with an average

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<v Speaker 1>increase of less than one and a half percent. But

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<v Speaker 1>my thought was, well, g one and a half percent annualized,

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<v Speaker 1>there is a lot better than you would get in cash.

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<v Speaker 1>There must be a better way than actually selling in

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<v Speaker 1>May and going away. And I actually own that you

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<v Speaker 1>are better off rotating than you are retreating. Um. So

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<v Speaker 1>I looked at five different strategies. Being in the market

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<v Speaker 1>all year long, um being in stocks from November through April,

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<v Speaker 1>but then selling and going into cash, being in the

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<v Speaker 1>market November through April, but then being in the Barclays

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<v Speaker 1>agg made through October, the SMP, low volatility, and just

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<v Speaker 1>a second, when you talk about Barkley ZAG, I just

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<v Speaker 1>want to make sure that we're talking about the Barkley's

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<v Speaker 1>Aggregate Bond Index right, That is correct. So if an

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<v Speaker 1>investor wanted to follow along with an e t F

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<v Speaker 1>it would be a g G that would replicate that.

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<v Speaker 1>And then finally you talked about the smart beta shift.

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<v Speaker 1>I'll have to ask you about that. And then you

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<v Speaker 1>said sector rotation. What what did you discover for strategy

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<v Speaker 1>number one? The idea of staying the course. Staying the

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<v Speaker 1>course was not as bad as you would think. The

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<v Speaker 1>compound annual total return since was nine point nine um.

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<v Speaker 1>You ended up getting your standard deviation of eighteen um.

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<v Speaker 1>You had a very good year up thirty eight percent,

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<v Speaker 1>and also a very bad year down thirty seven percent,

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<v Speaker 1>being in two thousand and eight. So that was the benchmark,

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<v Speaker 1>the hurdle against which the other strategies were measured. All right,

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<v Speaker 1>tell us now about cashing out. Let's say you actually

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<v Speaker 1>cashed out and sold everything in May and then we're

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<v Speaker 1>fully invested from November the first of the following year. Well, indeed,

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<v Speaker 1>you saw your volatility go down, the standard deviation went

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<v Speaker 1>from eighteen down to ten and a half. Your worst

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<v Speaker 1>year went from thirty minus thirty seven percent to minus

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<v Speaker 1>ten percent. But you paid for it because instead of

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<v Speaker 1>getting a nine point nine percent compound total return, you've

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<v Speaker 1>got eight point nine percent. Uh. And so as a result. Yes,

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<v Speaker 1>you you get for what what you pay for. And

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<v Speaker 1>if you're looking for low volatility, then you took a

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<v Speaker 1>lower return. So Sam, if you're planning to organize a

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<v Speaker 1>Memorial Day holidaying, before you do so, you say, you

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<v Speaker 1>know what I'm gonna put my cash, I'm gonna take

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<v Speaker 1>it out of the stock market. I'm gonna put it

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<v Speaker 1>in the Barkney's Aggregate Bond Index. How do you do? Then? Um?

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<v Speaker 1>The Then actually the number start looking pretty good. The

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<v Speaker 1>instead of nine point nine for the SMP all year long,

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<v Speaker 1>you've got eleven point three percent. By engaging in this

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<v Speaker 1>semi annual rotation, UM, you ended up seeing a fairly

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<v Speaker 1>low volatility reading, going from eighteen down to twelve. Your

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<v Speaker 1>worst year, instead of being minus thirty seven for the SMP,

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<v Speaker 1>was minus fourteen. UM. But you still only beat the

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<v Speaker 1>market percent of the time, so you still in a

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<v Speaker 1>sense had a batting average that was less than fifty.

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<v Speaker 1>All right, So we move on from the bond index

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<v Speaker 1>to what is called smart beta. What is smart beta? Well,

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<v Speaker 1>smart beta is when you engage in different screening technique

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<v Speaker 1>to try to come up with returns that exceed that

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<v Speaker 1>for the S and P file five hundred, while at

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<v Speaker 1>the same time probably having lower volatility. Sp l V

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<v Speaker 1>is the S and P five hundred Low Volatility Index,

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<v Speaker 1>which contains the one hundred stocks with the lowest trailing

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<v Speaker 1>twelve month volatility, and this grouping gets reviewed every quarter,

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<v Speaker 1>so it in a sense is a defensive approach of

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<v Speaker 1>owning equities. And by using that in place of bonds

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<v Speaker 1>or cash in then May through October period, you ended

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<v Speaker 1>up with a near twelve percent compound total return. You

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<v Speaker 1>beat the market fifty six percent of the time. You

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<v Speaker 1>still had lower volatility. Uh and instead of getting in

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<v Speaker 1>minus thirty seven in two thousand and eight, you've got

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<v Speaker 1>a minus twenty five, so second best but not the

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<v Speaker 1>top of the heap. How about if you just let

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<v Speaker 1>it rotate into such industry says Consumer Staples and Healthcare. Well,

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<v Speaker 1>interestingly enough, I guess when the going gets tough, the

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<v Speaker 1>tough go eating, smoking, and drinking, and if they overdo it,

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<v Speaker 1>they have to go to the doctor. Works perfectly made

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<v Speaker 1>through October because this rotationary strategy gained more than thirteen percent,

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<v Speaker 1>It beat the market six of the time with also

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<v Speaker 1>a very low standard deviation. And amazingly, this stock portfolio

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<v Speaker 1>over the past twenty five years. Its worst year was

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<v Speaker 1>two thousand and eight, down twenty one versus thirty seven

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<v Speaker 1>for the stock market as a whole. What's the most

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<v Speaker 1>efficient way to employ that strategy? It would be using

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<v Speaker 1>UH the e t s of x LP for consumer staples,

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<v Speaker 1>x l V for healthcare UH, and then using sp

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<v Speaker 1>Y for the sm P five hundred. What's also interesting

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<v Speaker 1>is that this selling may strategy rotating to different sectors

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<v Speaker 1>is not only a good strategy for large tap stocks,

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<v Speaker 1>but for the equal weight SMP five hundred the small

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<v Speaker 1>cap six hundred UM. So you could look to those

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<v Speaker 1>indices from Googgenheim as well as from power Shares UH

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<v Speaker 1>to get the ticker symbols, and the rotation effect has

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<v Speaker 1>a similar three to four hundred basis points about performance

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<v Speaker 1>per year. We're speaking with Sam stoval. He is US

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<v Speaker 1>equity strategist SMP A Global Market Intelligence also the author

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<v Speaker 1>of the Seven Rules of Wall Street. Sam Stovall looking

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<v Speaker 1>at the performance as we started this segment, looking at

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<v Speaker 1>the SMP five hundred, a gain of nine tenths of

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<v Speaker 1>a percent. If you've yet to hit your benchmark as

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<v Speaker 1>an investment manager so far, this year. What are the

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<v Speaker 1>chances do you believe that you'll actually accomplish that by

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<v Speaker 1>the end of Well, I think this is definitely going

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<v Speaker 1>to be a challenging year. It is the eighth year

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<v Speaker 1>of this bull market since World War Two. What I

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<v Speaker 1>did was I counted up the number of one percent

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<v Speaker 1>days in counting in bullmarket years, and on average, we've

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<v Speaker 1>got sixty five in the year that we just concluded, Well,

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<v Speaker 1>we have eighty five to look forward to as the

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<v Speaker 1>average for this year, so high volatility. I think we

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<v Speaker 1>need to see an improvement in earnings expectations. We started

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<v Speaker 1>the year thinking that the SMP would post a seven

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<v Speaker 1>and a half percent increase in operating earnings. Now that

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<v Speaker 1>estimate is less than one half of one percent, So

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<v Speaker 1>I think things need to turn around. We need to

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<v Speaker 1>see an improvement in the earnings projections because while inflation

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<v Speaker 1>remains fairly low, valuations remain fairly high, and you can

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<v Speaker 1>only have high valuations when inflation remains low and earnings

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<v Speaker 1>are on the rise. Thank you very much. Sam Stovall

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<v Speaker 1>is u S Secuity Strategist for SMP Global Market Intelligence,

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<v Speaker 1>SMP Capital i Q, also the author of the Seven

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<v Speaker 1>Rules of Wall Street. If you're listening to taking Stock

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<v Speaker 1>on Bloomberg Radio, I'm pim Fox to take it through

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<v Speaker 1>to the close. Next on Bloomberg Radio,