Daniel Balakov
Quantitative strategists at Bank of America have set out to bust a few market “myths,” saying there are some investment adages that sound smart, but it turns out that those narratives don’t work.
The U.S. Quantitative Strategy team led by Savita Subramanian said amid a continued period of macro uncertainty and numerous economic and market crosscurrents that it has heard a number of myths related to market behavior. “Buybacks drive performance” are among the myths the BofA team tackled in its annual primer on techniques in quantitative analysis, published Friday.
Here’s a look at some of the myths listed by BofA:
False: buybacks drive performance
BofA expects a shift to dividends from stock buybacks, but such a move does not spell doom for the S&P 500 (SP500)(SPY)(IVV). “Actually, the relationship between S&P 500 buybacks and index performance since 1986 is a near-zero R-squared,” Subramanian said.
It also found that BofA corporate client buybacks appear to have little effect on index performance. “What we can validate is that companies that repurchase shares at inexpensive valuations tend to outperform,” she said. Over the past 12 months through April, cheap buybacks outperformed expensive buybacks by 12.5 percentage points.
False: retail investors are a contrary indicator
There’s thinking that when retail investors are buying, that means it’s time to sell, and vice versa. But BofA’s equity client flows suggest returns following periods of retail inflows have been above average and returns post-retail selling have been below average, with a similar spread to hedge funds. BofA said its Low Institutional Ownership factor – which includes high retail ownership stocks – has more consistently outperformed during market drops.
False: flows into equities push multiples higher
“One might intuitively expect multiples to expand with inflows, and compress with outflows. In actuality, the correlation between equity flows and valuations is effectively zero,” Subramanian said.
She said their work suggests other elements are keeping the S&P 500 (SP500) at its current “lofty snapshot multiples”, including the index’s higher margin sector mix and lower earnings volatility than in the 2000s, 1990s, or 1980s.
False: during periods of wage disinflation, labor-intensive companies outperform
“Investors shouldn’t own labor-intensive companies under almost any circumstances based on our analysis,” Subramanian said. Despite the Federal Reserve’s aim to cool wage inflation, companies with the highest ratio of number of employees per dollar of sales have been almost constant laggards relative to their labor-light counterparts, BofA found.
Investors who want to track moves in large-cap stock indexes can check out ETFs including (DIA), (RSP), (SSO) and (QQQ).
Mid-caps ETFs include: (IJH), (MDY), and (SCHM) and small-cap ETFs include: (IWM), (VBK), and (DFAS).
