Remember SARS, the severe acute respiratory syndrome that caused
quite a stir about a decade ago and -- like many other viral
diseases ranging from influenza to AIDS -- has the scary potential
to mutate into a really scary pandemic? I will not mention names,
but during the last outbreak, one of the Wall Street brokerage
houses released a global SARS strategy report for you to follow,
step by step, as a way of profiting from a potential outbreak.
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
). Another is gold, which is
). The rest of the set is simply another motley collection of
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
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.