Details Matter in Investments and Leap Years
Doug Walters
Little changes to our calendar over time help keep our seasons on track. Evidence-based investors similarly exploit small opportunities over time to keep portfolios on track.
Contributed by Doug Walters , David Lemire , Max Berkovich , Eh Ka Paw
Leap years – those rare occurrences when an extra day is added to our calendar – seem straightforward at first glance. We’ve been taught that they happen every four years. But the devil is in the details. Some years are skipped, and the pattern isn’t as simple as it appears. This is much like investing, where seemingly straightforward decisions can hide complexities beneath the surface.
Leap Years: More Than Meets the Eye
I put together a trivia game on Thursday to celebrate Leap Day. The first question was, “True or False, leap years occur every four years.” The answer was False, and the vast majority got it wrong.
- The Four-Year Rule: It’s a tidy rule of thumb that leap years are every four years, but it’s not entirely accurate. The Earth’s orbit around the sun takes approximately 365.24 days, not 365. To account for this, we add an extra day (February 29th) to the calendar every four years. But…
- The Exceptions: Not all years divisible by four are leap years. If a year is evenly divisible by 100 (like 1900), it’s not a leap year unless it’s also divisible by 400 (like 2000). So, 1900 wasn’t a leap year, but 2000 was. The devil is in these details.
Investment Decisions: The Hidden Complexity
The stock market is full of these hidden complexities. As evidence-based investors, we relish the opportunity to know them and, where possible, exploit them. In doing so, we aim to construct portfolios where returns are enhanced without taking undue speculative risk. Here are some examples of common misconceptions:
The fallacy: You can’t beat the market, so just own the whole market in an index fund
- False. Academic research and real-world evidence show that certain market segments persistently outperform. These proven, persistent factors include Quality, Value, Momentum, and Size.
The Fallacy: The S&P 500 is a well-diversified portfolio
- False. A well-diversified portfolio takes full advantage of the one free lunch in finance. Exposure to a broader base of assets, including small-cap, international, bonds, and real assets, can increase returns over the S&P 500 without increasing risk. Not to mention that the S&P 500 faces significant concentration risk these days, given the high exposure to the so-called magnificent seven mega-cap stocks.
The Fallacy: You should avoid selling investments with gains to avoid paying taxes
- False. I’ve never met anyone who likes to pay the tax collector, but taking gains regularly through opportunistic rebalancing ensures that you 1) maintain the proper risk balance in your portfolio, 2) avoid unintended concentration, and 3) sell your winners before they become losers. Paying taxes may feel bad, but watching a previous winning investment slide to fresh lows hurts more.
Small, calculated adjustments help keep our calendar in sync with our orbit around the sun, avoiding significant deviations over time. Likewise, knowledge of and attention to the finer details of investing can help keep your financial picture trending in the right direction. As evidence-based investors, we embrace and use this complexity to our client’s advantage.
Headline of the Week
Mind the Gap
With earnings season drawing to a close, Wall Street’s microscopes are returning focus to inflation or, should we say, “inflations” plural. Earlier last month saw the Consumer Price Index (CPI) surprise on the high side, prompting a short-lived sell-off. This week saw a more benign inflation report; the Personal Consumption Expenditures (PCE) report came in below the CPI figure. While the PCE was largely in line with expectations, the gap between the CPI’s estimate of annualized inflation (3.1%) and the PCE’s (2.4%) is among the widest it has been, which can introduce some confusion.
The CPI has first mover advantage as it is published earlier each month, and it tends to get the bulk of the attention. This is especially so when there are surprises and even more so when we are at an inflection point in the interest rate cycle (like now). However, no financial press story can mention PCE without immediately mentioning that it is the Fed’s preferred measure. For those hoping the Fed cuts rates sooner rather than later, the PCE warrants monitoring.
The Week Ahead
We have a busy week in store to kick off March. The Jobs report on Friday, Central Bank chatter, and Politics are just the tip of the iceberg.
The Big Question
The European Central Bank (ECB) has a rate decision next week.
- While no one expects any move in rates at this meeting, hints of June or July are the question.
- The market is looking for three to four cuts in 2024.
- Germany has been most heavily impacted by the high rates, dragging the export-reliant economy into a technical recession.
- Inflation numbers have also rolled over, with annual inflation reading in February at 2.6%.
- Inflation progress and recession in Germany should be enough to tip the scale to June.
Signs
The non-farm payroll report on Friday is expected to remain strong.
- Strong… but also less strong than the previous months, with consensus expectations under 200,000 new jobs created, a far cry from the blowout report for January of 353,000 jobs.
- The unemployment rate is expected to stay steady at 3.7%, and hourly pay is expected to keep ticking higher but at a decelerating rate.
- The key will be revisions to previous months’ numbers. There are whispers out there that the big numbers for December and January could be revised higher by as many as 125,000 jobs.
- With inflation remaining resilient and job creation running at full steam, something will have to shake the Federal Reserve to cut rates.
- Headlines of job cuts in the technology space will have to appear in these reports at some point, but slowing wage growth may be the first sign.
- The JOLTS jobs data and ADP report earlier in the week will add further fodder to the employment picture.
Super Tuesday
Besides the 16 States that host Presidential primary elections, Tuesday will be super for asset allocators because China holds the “Two Session” meeting.
- The powers that be (National People’s Congress) in China sets growth targets at this confab.
- While expectations that a 5% growth rate and 3.5% deficit as a percentage of Gross Domestic Product will be maintained, most experts are looking for signs of stimulus.
- Chinese stocks have bounced back from a five-year low heading into the session but can use some help since the recent bounce is attributed to short-selling regulation changes and state-led buying.
Capital Bound
The State of the Union address in the evening and Federal Reserve Chairman Powell’s semi-annual testimony in front of the Senate Financial Services Committee in the afternoon are true reality TV.
- Having U.S. Senators grilling the Chairman on when he will pilot the rates down should be interesting.
- The State of the Union may not have happened at all this year, as the Speaker of the House was pressured to skip the annual invitation for the President to address a joint session of Congress.
- In either case, the hostile audience will add drama to both events.
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