Fama-French Monthly 5 Factor Returns
In the first four charts we look at the average returns to factors when the yield curve steepens or flattens by more than 5 bps. The 5 bps threshold is used for both daily and monthly data. This analysis ignores days (and months) where the yield curve changes by less than 5 bps.
We segment the Fama-Frech 5 factor performance based on yield curve changes of 5 basis points or more during the month, ignoring any months in which the yield curve changed by less than 5 basis points. We also segment the time period into early (before 1990), middle (1990 to 2007), and recent (since mid-2009). Recent performance does seem to be different from that of before the great financial crisis (GFC).
We segment the Fama-Frech 5 factor performance based on economic regime according to the following rules: * Expansion if growth indicator > 0 and inflation indicator > 0 * Slowdown if growth indicator <= 0 and inflation indicator > 0 * Contraction if growth indicator <= 0 and inflation indicator <= 0 * Recovery if growth indicator > 0 and inflation indicator <= 0
This paper by Keller and Keunig describes using two equity ETFs (VWO and BND) as canary assets to determine when to move to cash in a tactical (defensive) asset allocation system. In this section we test this idea using the Fama-Frech 5 factors in the subsequent month from when the momentum was measured. We calculate the average 1M, 3M, 6M, and 12M volatility-adjusted momentum for VMO and BND. There are three posibilities, both ETFs have positive momentum, both have negative momentum, or one has positive momentum and the other has negative momentum. We notice that the momentum factor does much better when both canary assets are positive. Also, profitability, which is a quality factor, does best when both canary assets are negative. Since this factor is based on ETFs, we only have data back to 2008. We see that value has been weak for that entire period, no matter what the canary assets were indicating.
Notes: Pre-GFC is from January 1990 - December 2007. Post-GFC is from July 2009 - Present.
The Fama-French factors can be downloaded from the Kenneth R. French Data Library.
The growth indicator is defined as the ISM PMI minus 50 standardized plus the three month change in the ISM PMI standardized. The ISM PMI is from Quandl, code “ISM/MAN_PMI”.
The inflation indicator is defined as the average three month average minus the three year average of the CPI, FRED data code CPIAUCSL.