Alpha Power Investing NewsletterMarch 1, 2017
A Long-Term Formula for Investment Success
Readers of our monthly newsletters are by now well versed in the potential benefits of the "Sell in May" method of investing. As we have described in great detail in previous newsletters, the stock market has demonstrated a persistent long-term trend of performing much better between the months of November through May, than between the months of June through October.
This month we would like to expand our horizons just a bit and highlight the investment calendar laid out in Figure 1. This calendar incorporates the "sell in May" method of investing, but also revolves around the four-year presidential election cycle. This investment calendar is used by Alpha to execute the strategy known as The FormulaTM.
As you can see in Figure 1, the calendar has three distinct investment "Periods". Each period holds a different asset allocation as follows:
To illustrate the power of this investment calendar, let's take a look at how these various indexes performed during the periods listed above from January 1981 through December 2016.
Period #1: S&P MidCap 400 Index
Figure 2 displays the cumulative growth achieved by buying and holding the S&P MidCap 400 Index only during those months labeled as Period #1 in Figure 1.
The results in Figure 2 were generated using monthly total return data for the S&P MidCap 400 Index from the PEP database from Callan Associates.
Period #2: Intermediate-Term Bonds
Figure 3 displays the cumulative growth achieved by buying and holding intermediate-term treasury bonds (as described below) only during the months labeled as Period #2 in Figure 1.
The results in Figure 3 were generated using monthly total return data for the Bloomberg Intermediate Treasury Index from the PEP database from Callan Associates.
Period #3: S&P 500 Index and NASDAQ 100 Index
The presidential election cycle causes a cyclical bias which has been operating in the U.S. market since the formation of the Federal Reserve in 1913. Specifically, the election cycle tends to skew returns into a 15-month period beginning with the mid-term elections. After the mid-term elections, the dominant political party typically does whatever they think they can to make the U.S. economy vibrant during the election year. This generally plays well on Wall Street. Both the S&P 500 and the NASDAQ 100 represent large-cap stocks. Large growth companies tend to do very well during this optimistic period in the election cycle.
Figure 4 displays the cumulative growth achieved by buying and holding 50% in the S&P 500 Index and 50% in the NASDAQ 100 Index (as noted below) only during those months labeled as Period #3 in Figure 1.
Note: For this test, total return data for the S&P 500 Index and the NASDAQ Composite Index is used from January 1981 through March of 1996. From April 1996 through December 2016 the S&P 500 Index and the NASDAQ 100 Index is used. The results in Figure 4 were generated using monthly total return data for the indicated indexes from the PEP database from Callan Associates.
For our test, the monthly return is calculated by taking the average of the S&P 500 monthly total return and the NASDAQ (100) monthly total return.
Summary of Index Data Testing
There is no "magic formula" for achieving investment success in the stock market. Still, the seasonal tendencies highlighted in this month's newsletter have demonstrated a high degree of long-term consistency.
To learn more about our strategies, go to the Strategies and Performance page of our website at www.alphaim.net to read the brochures and fact sheets.
Disclosures: Past performance is not a guarantee of future performance. Indexes are not investment vehicles. The returns illustrated above are not returns of any Alpha strategy and do not include management fees or the cost of funds, trading, or other expenses. To see the impact of these costs, please refer to the net of fees and expenses performance data for specific Alpha strategies. The illustrations above are designed to quantify the effect of certain time periods on a representative market index.
Alpha Investment Management, Inc. is an SEC registered investment advisor. Such registration does not imply a certain skill or training and no inference to the contrary should be made. The information and opinions expressed in this document are for informational purposes only. Any recommendation or opinion made in this document may not be suitable for all investors. The information contained herein does not constitute and should not be construed as investment advice, an offering of investment advisory services, or an offer to sell or a solicitation to buy any security.
© 2017 Alpha Investment Management, Inc.
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