Kick ‘Em, or Pick ‘Em When They’re Down?

Should you “kick ‘em when they’re down”, or “pick ‘em when they’re down”? At first glance it may be easy to “kick ‘em”, but recent research has shown that asset classes, not individual stocks, that have been down for 3 (or more) consecutive years are extremely good buys.  Researcher and money manager Meb Faber has recently published work that shows that asset classes that have been down 3 years in a row produced an average of more than +50% return in the following 2 years.  Asset classes down 4 and even 5 years in a row produce an even higher subsequent 2-year returns.  Some 2-year return examples from the last several decades are:

  • US Bonds (down 1978, 1979, and 1980): +48%
  • US equities (down 2000, 2001, and 2002): +43%
  • Foreign Developed (down 2000, 2001, 2002): +69%
  • Foreign Emerging (down 2000, 2001, and 2002): +96%.

Similarly, Individual country indices if down 3 years in a row equal+56%, while sectors and industries if down 3 years in a row equal +59%.

Which brings us to the present, the Emerging Market and Commodities asset classes have both been down 3 years in a row.  The last time that Emerging Markets were down 3 in a row that asset class rocketed +96% in the next 2 years.  Commodities have never been down 3 years in a row before, so we have no precedent to look back on, but there is no good reason to believe commodities shouldn’t participate in this “mean reversion” behavior, as well! Several of our tactically managed models reinitiated positions in the Emerging Market asset class on April 1st. We decided to “pick ‘em when they were down!

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