Alpha Power Investing NewsletterNovember 29, 2011
In The Zone
It doesn't feel like it, but we have entered the stock market's annual "power zone", which stretches from late-October to late-April for large cap stocks and late-October to late-May for mid and small-cap stocks.
Over the past 30 years, the S&P MidCap 400 Index has been down just four times during the power zone. The chart below details the 30-year record.
As the table documents, owning the S&P 400 MidCap Index for just seven months a year for the past 30 years has produced an annual return of 13.4%. Naturally, investing in safe, fixed income vehicles the rest of the year would boost this return substantially.
Conversely, owning the mid-cap index the other five months of the year (dead zone) has proven to be a losing strategy over the same three decades, but particularly since the beginning of 2000. The graph below shows the cumulative differences:
As dramatic as these differences appear, they are expressed in nominal, not real, percentages. After adjusting for inflation, the S&P 500 is down 39% since 2000, while the S&P 400 Power Zone is up 190%. That's the difference between an annual purchasing power loss of 3% for the S&P 500 and an annual purchasing power gain of 8% for the S&P 400 Power Zone.
For the typical stock market investor, the past twelve years has been even more devastating since empirical studies show that the average mutual fund investor nets about half the return of the S&P 500 over time.
We are now in the most difficult investment environment since the 1970's. During the 70's and the early 80's, inflation was the issue. Now the issue is the "Great Unwinding" - the long-term deleveraging of the vast pool of debt that hangs over individuals and companies globally. As long as deleveraging continues, the demand for money will remain subdued and interest rates will trend within a low-yielding range of returns. At the portfolio level, long-term investment success now hinges on stock selection or market timing or both.
The key to investment success over the next decade is selective involvement in the stock market. Owning mid-cap stocks (index funds) during future power zones will, I believe, deliver substantial, real returns to long-term investors. Not all power zones will be profitable, yet, just as in the past, the long-term abatement of market risk should be rewarding. Remember, there has not been a bear market in the entire 30-year mid-cap "power zone" series.
It is impossible to know now whether the current power zone will be profitable or not. The fat lady sings on May 31st. Superior investment strategies are not built on knowing short-term outcomes, but rather depend on the constant application, year after year, of a proven methodology.
Sincerely,1-877-229-9400, Ext. 11
Jerry Minton, Ph.D.
Past performance is not a guarantee of future performance.
© 2011 Alpha Investment Management, Inc.