Fear the Pharoah?

In early June, the world watched in amazement as American Pharoah captured the Triple Crown. No horse has achieved this elusive feat since 1978, and there have only been 11 previous winners. As exciting as it is, some pundits are quick to acknowledge another Triple Crown trend: every time a horse has won the Triple Crown, the stock market has fallen an average of 9% for the rest of the year.

So are those predicting a bear market correct? Should we, in fact, fear the pharaoh?

Economists are notorious for putting esoteric information on a chart, drawing lines between seemingly random points, and using it as basis to provide meaning. In addition to the Triple Crown Index, other famous examples include:

  • High Heel Index: During economic downturns, high heels get higher. In fact, one article claims the median height of women’s heels peaked at seven inches during the height of the Great Financial Crisis!
  • Sports Illustrated Swimsuit Issue Cover Index: This index suggests US equity markets perform better in years when a US model appears on the cover of the magazine.
  • Hemline Index: A theory presented by Wharton School professor George Taylor in 1926 which posits hemlines tend to rise along with stock prices.
  • Super Bowl Index: Perhaps the most famous of the indicators, the Super Bowl Index predicts a stock market swoon if the AFC wins the title, and a bull market rally should the NFC take home the Lombardi trophy.

At the CEO Summit earlier this year, Robert Balentine presented a chart showing the decreased height of recent Federal Reserve Chairpersons and the decreased level of interest rates during their respective tenures as a tongue-in-cheek explanation of today’s historically low interest rates!

While equine races and fashion industry economic indicators are fun, they should not be the bedrock of an investment thesis. Contrarily, at the heart of Balentine’s investment philosophy is the idea of discipline and a focus on what we can control.

As we wrote in the previous Market Notebook entry, The Importance of Investment Discipline, our philosophy originates from understanding three key points:

  • Thoughtful diversification is better than trying to time the markets.
  • Portfolios should always be proactively rebalanced through time.
  • Historical context matters.

While exercising patience and discipline, Adrian Cronje told The Journal of the CFA Society of the UK in its April 2012 CIO Roundtable, “It is important to focus on what you can control…What you can control is the amount of risk you take, the liquidity levels in portfolios, spending and distributions you allow from your portfolio, the attitude you take toward rebalancing (agnostic, calendar-driven, or more opportunistic?), the cost, fees and taxes you pay to implement and, finally, what and how you communicate.” Balentine’s Capital Markets Forecast, published each year, highlights how these ideas inform our portfolio construction decisions.

So, should investors fear the Pharoah? We don’t believe so.  Instead, investors should take the Triple Crown for what it is—a momentous occasion in sports—and not the basis for an investment thesis.  Instead, let a disciplined approach and a focus on the things you can control be your guidelines. While it may not be as exciting as a Triple Crown winner, our track record over two full market cycles has demonstrated how we are able to protect capital when times are bad and, correspondingly, how we are able to capture mispricings when opportunities present themselves. Taken together, we have confidence ours will be a repeatable process in the future.

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