November 2020 performance update
A few days ago I mentioned I’d be giving a performance update for November pending our data provider, IEX Cloud (the ICE exchange’s API data service), finishing a major systems upgrade it initiated on December 1. It appears IEX is still sorting out some of the technical details, so I’ll hold off on updating my cumulative total return calcs until that’s final (that’s the line chart with daily returns that I typically include in these performance updates and that you see on our Performance page). I did, however, want to share the details for November, which are below. Prime members can see an unredacted copy of the first chart in our Prime Model Picks page, as usual.
So what happened in November. For those not paying attention on a daily basis, the market had a big month. As the tables below show, SPDR’s S&P 500-tracking SPY ETF was up almost 10 percent—in a single month (the average historical return since 1927 is about 0.9 percent per month). Three drivers seem obvious to me: (1) attenuated market risk as a result of the resolution of U.S. federal elections (not quite resolved, given Georgia runoffs, but almost so) ; (2) the great vaccine news; and (3) renewed stimulus hopes in the waning days of the month.
So the market was up, and the among the stocks that, in aggregate, compose the market, our Prime model simply selected among the best, which is exactly the goal around these parts, and booked a mind-boggling 17.71 percent. Our free Select model hasn’t been on fire nearly as much, but I won’t turn my nose up at an intentionally second-tier model when it churns out 8+ percent over a one-month period.
At this point, astute observers trying to reconcile Stoney Point’s results with the conventional wisdom that it’s better to just hold the market might wonder whether what’s going on here is an overweighting toward prominent tech stocks and whether that means an alternative benchmark, like the Nasdaq 100, would be more appropriate. In my view, that would be a sensible preliminary prior to have. But it’s not what’s going on here.
First, the Nasdaq 100 didn’t really outperform the S&P 500 by much this month. QQQ (Invesco’s Nasdaq 100-tracking ETF) was up 10.26 percent compared to SPY’s 9.65 percent, so exposure to the factors that drive QQQ’s returns (tech stocks) would have a hard time explaining our Prime model’s 17.71 percent return.
Second, a subtler point related to the correlation in QQQ’s return and SPY’s: the overall stock market itself is increasingly weighted toward Nasdaq/tech stocks (including the market’s largest stocks), so in using the S&P 500 one is implicitly imputing tech into the benchmark. On average, Stoney Point’s allocation to Nasdaq 100 stocks doesn’t appear to be substantially different from the overall market’s allocation to those stocks. Specifically, only four of 10 for each of the Prime picks and the Select picks last month were Nasdaq 100 constituents, and none were among the top performers in the bunch anyway. FTI, the 44.77 percent return in the Prime set, is an oil and natural gas services provider. Southwest, in the Select set, is an airline. Every single one of our picks, however, is an S&P 500 constituent (some of which are also Nasdaq 100 constituents). So even if Nasdaq 100 stocks explained the market’s performance, there would still be about 8 percent points of Prime returns left unexplained.
Lastly, the underlying algorithm is based entirely on fundamental data from companies’ financial statements and market prices—there is no industry-specific filter, except the exclusion of banks and other financial-sector stocks, which are another animal entirely. Depending on what’s happening in the market, it could work out that we end up with a big allocation to industrial companies in some months. In other months, it could be consumer durables. More often than not, what I see in the model over time relatively stable exposures to a diverse range of industry effects.
That’s all for now!
