Essential Metrics to Analyze in Stock Markets
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Chapter 1: Key Metrics for Quarterly Review
As a quantitative portfolio strategist, I often contemplate which visuals and metrics are crucial to analyze every quarter. Below, I outline ten essential metrics that I intend to review. While I haven't created the actual charts yet, I wanted to document these insights before they slip my mind. Feel free to adapt them for your own evaluations.
Section 1.1: Stock-Bond Correlation Analysis
One critical metric is the trailing 90-day stock-bond correlation over time. Historically, bonds have served as a reliable diversifier—when other investments falter, Treasury bonds typically rise. However, in today's market, bonds may not always offer the diversification they once did.
Section 1.2: Factor Correlations During Market Fluctuations
It's also important to analyze correlations between macro factors and equity styles during periods of low versus high VIX. Additionally, observing these correlations in relation to rising or falling interest rates can reveal whether the low correlations you rely on for diversification hold up during turbulent times.
Subsection 1.2.1: Understanding Asset Class Betas
Examining the betas of various asset classes—such as stocks, Treasury bonds, corporate credit, and commodities—against real GDP, inflation, and interest rates can provide insight into how macroeconomic changes affect asset class returns.
Section 1.3: Quarterly Factor Return Analysis
A periodic table showcasing factor returns by quarter can help identify which factors are performing well and which are lagging. This analysis can clarify whether factor outperformance tends to continue or revert to the mean.
Chapter 2: Portfolio Performance Comparison
To better understand portfolio construction techniques, comparing the performance of a 70-30 stock-bond portfolio, a mean-variance efficient portfolio (aimed at the same risk), and a risk-parity portfolio over the past decade is beneficial. Which method has proven most effective?
The first video titled "Top 10 Stocks to Buy Before The Election" provides insights into strategic stock selections that may perform well in the lead-up to an election, helping investors identify potential opportunities.
Section 2.1: Analyzing Drawdowns
Similarly, evaluating the drawdowns of these portfolios reveals which construction strategies have been most effective in capital preservation.
Subsection 2.1.1: Tail Loss Comparisons
A historical analysis of 1% quarterly tail loss over the last 20 years, compared to estimates based on a normal distribution, can serve as a sanity check against the market's normality assumption. Additionally, contrasting historical 5% quarterly tail loss with Value at Risk (VaR) can further illuminate potential underestimations of extreme market conditions.
Section 2.2: Sector Valuation and Growth Rate
Investigating the current price-to-earnings (PE) ratio by S&P sector in relation to the overall S&P PE ratio and the five-year average can highlight which sectors are undervalued or overvalued. Similarly, analyzing the current revenue growth rate by sector can provide context on sales performance relative to historical norms.
Chapter 3: Risk Contribution Analysis
Analyzing risk contributions within a 70-30 stock-bond portfolio—by risk factor, sector, and the top ten stocks by market cap—can enhance our understanding of the portfolio's variance. This decomposition helps ascertain whether risk is concentrated within a few stocks or sectors. It's crucial to recognize that risk contribution differs from portfolio weight, as some holdings may carry significant weight while having minimal risk exposure.
The second video, "10 Investing Tips for Stock Market Beginners," offers valuable insights for novice investors, equipping them with fundamental strategies for successful market participation.
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