Knowledge is Power: Concentration in S&P 500, Emerging Market Leadership, Railroads Edition

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U.S. stocks have performed well at least so far this year. The S&P 500 is up over 18%. It remains to be seen if these gains hold through the rest of the year. Markets have become more volatile this month and fears of a correction are getting louder every day. International equities are also having a great year. Among the emerging markets, India’s Sensex has shot up over 23%. Brazilian equities have declined by 6% but Mexican stocks have gone up by a decent 16%. Frontier marker Argentina’s Merval has soared by over 53%.

With that said, below are some interesting articles for the weekend:

Stocks to explore:

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Saint Basil’s Cathedral, Moscow, Russia

Performance of Gold vs. Stocks, Bonds and Commodities: Chart

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Gold is an important asset class to own in a well-diversified portfolio. However investors always wonder if gold is better than assets like stocks bonds, stocks and commodities. Gold is also known to be a great asset to beat the raves of inflation. An article in the journal last month noted that gold has underperformed stocks over the past 50 years. Since August 1971, the annualized return on the S&P 500 is 11.2% including dividends reinvested while gold produced an annualized return of just 8.2%.

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Source: Gold as an Inflation Hedge: What the Past 50 Years Teaches Us, WSJ

From the article:

Gold is only a good inflation hedge over time frames far longer than any of our investment horizons, according to research conducted by Duke University professor Campbell Harvey and Claude Erb, a former commodities portfolio manager at TCW Group. They found that it’s only when measured over very long periods—a century or more—that gold has done a relatively good job maintaining its purchasing power. Over shorter periods its real, or inflation-adjusted, price fluctuates no less than that of any other asset.

Even a small allocation of gold in a diversified portfolio can improve the risk adjusted returns. This is because historically gold has a positive correlation to rising risk assets and negative correlation to falling risk assets. To put it simpler ways, it means when risky assets such as stocks are falling then gold would rise and vice versa.

The following table shows the performance of gold vs. stocks and commodities during major risk-off crisis events in the past 30 years.

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Source: The case for a modest allocation to gold in super funds, FirstLinks

During the Global Financial Crisis (GFC) of 2008-09, the S&P 500 plunged 48%. During this time gold almost increased by bout the same percentage.

Related ETFs:

  • SPDR S&P 500 ETF Trust (SPY)
  • SPDR Gold Trust (GLD)

Disclosure: No Positions

Australian Stock Market – Up and Down Months Since 1875: Chart

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The Australian stock market has had many up and down months since 1875. However over the long term since that year the market has gone higher. The number of up months has been more than the number of down months. The following chart shows the performance of the Australian stock market since 1875:

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Source: Longest positive run for Australian shares since WWII by Ashley Owens, FirstLinks

The longest positive run lasting 14 months was from April 1942 to September 1943. After World War II, the longest positive run of 11 months ran up to August of this year.

Related ETF:

  •  iShares MSCI Australia ETF (EWA)

Disclosure: No Positions

The S&P 500 Dividend Yield is at a 20-Year Low

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The S&P 500 closed at 4,458 on Friday. The index is up over 20% as of last Friday’s close and has reached 54 records so far this year. The P/E ratio stands at over 34, well above the historic levels at around 20. At current levels, US stocks are expensive indeed. However that does not seem to stop investors’ attraction towards equities. In fact, as recent as last quarter even foreign fund managers were pouring money into the red-hot US equity market.

I have written many times before that the dividend yield of the S&P 500 has stayed low. It has been under 2% for a few decades. The dividend yield reached a 20-year low of 1.32% as of September 10th. This rate is well below the annual inflation rate according to an article by Frank Holmes at U.S. Global Investors.

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Source: Remembering 9/11 on the 20th Anniversary, U.S. Global Investors

With dividends so low, an argument can be made that investors are betting on the greater fool theory. Whether a stock is at $100 or $500 or even over $1,000 they are buying them anyway in the hope that they can unload it some other fool who is willing to buy at even higher prices. It remains to be see how long this logic will work.

The following chart shows the dividend yield of the S&P 500 since 1870:

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Source: Multipl.com

With multiple headwinds facing the US economy and the P/E ratio at above historic mean levels, caution is warranted with investing in stocks.

Related ETF:

  • SPDR S&P 500 ETF Trust (SPY)
  • iShares Select Dividend ETF (DVY)

Disclosure: No positions