Chart of the Month
Data Source: Eikon Reuters, EP calculations
‘Buy the close, sell the next open’ has become a popular strategy in the equity market in the past 10 years; this chart shows that prior to the Covid-19 crisis, it has averaged annual returns of 3.7% for a volatility of 3.6%, bringing the Sharpe ratio above 1, which is very good for an equity strategy. However, as a famous financial quote says: ‘Systematic strategies with an elevated Sharpe ratio are strategies that have not experienced a left tail’. That was it: if we include the Covid-19 effect, the Sharpe ratio is more than halved.
Data Source: US Conference Board
US consumer confidence peaked in October 2018, but the most recent March reading remains well above the pre-GFC highs. The sudden and devastating impact of the lockdown on economic activity causing almost 10 million people to file for unemployment, implies a hard and fast fall in consumer confidence to a low that is likely to resemble the 2009 nadir.
Source: Thomson Reuters Datastream
The last week of February recorded one of the worst weekly returns in the history of US equities. However, in the past 30 years, investors have made money, on average, if they bought equities following a week of negative returns. The exceptions are the years 2002, 2008 and 2018 (but losses were minimal in 2018 with average weekly returns of -8.4bps). The popular strategy of buying the equity market dips has worked well – except when there is a recession brewing!
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