I was curious to see if there’s a connection between the TED Spread and equity returns. The answer seems to be no, but there are some notable exceptions. That’s one of the issues in doing research—you spend a lot of time crunching the numbers only to reach a dead end. Still, I thought I’d share my results with you.
The TED Spread got a lot of attention during the financial crisis and it’s faded away since then. The TED Spread is the difference between the short-term Treasury yield and the Eurodollar yield (TED standing for Treasury-Eurodollar).
In short, this measures the level of panic within the financial system. For the most part, the TED Spread bounces between 0.1% and 0.5%. When folks get nervous, it spikes up to 0.7% and can even go as high as 1%. During the financial crisis, it spiked over 2% and got as high as 4.58%. That shows you just how scary those days were.
I went to the Federal Reserve’s database and took all the TED Spread numbers going back to 1986 and compared them with the Wilshire 5000 Total Return Index. I then divided the Ted Spread numbers into 10 buckets of increasing value (0.09% to 0.2%, 0.21% to 0.25%, etc.). I then saw how the market performed on those days, and I annualized those results.
Here’s what I got.
| Low Range |
Upper Range |
Count |
Return |
| 0.09% |
0.20% |
933 |
10.11% |
| 0.21% |
0.25% |
900 |
11.02% |
| 0.26% |
0.35% |
801 |
16.12% |
| 0.36% |
0.50% |
1,221 |
4.52% |
| 0.51% |
0.60% |
763 |
9.46% |
| 0.61% |
0.85% |
1,200 |
13.35% |
| 0.86% |
1.00% |
411 |
9.46% |
| 1.01% |
1.40% |
681 |
26.86% |
| 1.41% |
2.00% |
303 |
26.01% |
| 2.10% |
4.58% |
110 |
-59.52% |
In other words, the Ted Spread was between 0.09% and 0.20% 933 times. Over that period, the market had an annualized return of 10.11%.
There doesn’t appear to be any clear trend until we exceed 1%. The stock market does very poorly over 2.10%, but that doesn’t happen often. Interestingly, the market does quite well between 1% and 2.10%.
My hunch is that that reflects the market chilling out as the TED Spread falls from its elevated position. For example, the TED Spread was still quite high after the 1987 crash. At the market low in March 2009, the TED Spread was still over 1%. This means it may not be the TED Spread itself that’s important to the stock market, but the direction of the TED Spread. Of course, that’s a guess (and for another project).
Whenever I do research like this, I want to find a variable that has a consistent impact on stocks. For example, I found that stocks do well when the 10-year TIPs yield is low. The lower the better, and the higher the worse. Those are the types of relationships I want to find.
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I wouldn’t read too much into this fun, but I think it’s fun nonetheless:
To investigate the influence of weather on analysts, the team looked at 636,000 market observations by 5,456 brokerage-firm analysts known as sell-side analysts from 1997-2004. Because the researchers knew where the analysts were located, they could check the weather during each of the 636,000 observations.
Based on the calculations, comparing responses of analysts in good weather and bad when earnings announcements were made, analysts experiencing bad weather were 9% to 18% less likely to issue an annual earnings forecast; a recommendation to buy, hold or sell; or a target-price recommendation. Dr. deHaan says the calculations were designed to measure only the effect of weather, and canceled out such influences as characteristics of the firm, analyst or market conditions.
This morning, Snap-on (SNA) announced a 15.1% dividend increase. The quarterly payout will rise from 53 to 61 cents per share.
Annually, that comes to $2.44 per share. This year, Snap-on should earn about $8.06 per share. Last year, they earned $7.11 per share. That keeps their payout ratio around 30%.
There have been a few times when SNA has skipped raising its dividend so it doesn’t have a long streak like some others. Still, the company has a long trend of raising dividends.
The other day, I wondered if the value premium was a thing of the past. Today, I’ll set my sights on the small-stock premium.
This is the observation that smaller-cap stocks have historically outperformed their larger peers over the long haul. I’m very suspicious on this point. It could be that smaller companies are more nimble and have a greater ability to adapt to a changing marketplace.
The problem, however, is how this is measured. We have to remember how unbalanced the stock market is. There are a small number of giant companies, and thousands of tiny ones.
When divided into size deciles, the smallest 10% of stocks comprise about 3% of the total market. That’s about the size of one mega-cap stock. It would be like looking at the long-term outperformance of one particular S&P 25 stock and claiming a premium for it.
There’s also an issue of how volatile this premium is. Here’s a look at the Russell 2000 divided by the Russell 3000. This shows that over the last 37 years, small-caps have underperformed.
For it to be a premium, I think it needs better performance than that.
There’s also a larger problem methodology. Michael Batnick relates the poor statistical foundation that the long-term returns are based on.
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This morning, Moog (MOG-A) became our final Buy List stock to report earnings for this season. The company reported fiscal Q4 earnings 75 cents per share. However, 13 cents went to “incremental restructuring and impairment costs.” The company also said that they were hit by four cents due to a higher-than-expected tax bill. Wall Street had been expecting 92 cents per share, and the company gave us a forecast of 91 cents per share.
The market doesn’t seem too upset with the earnings miss. The shares are currently up about 1%.
The good news is that they’re standing by their forecast for next year of $4 per share.
Fiscal ’15 was a challenging year for our company across multiple fronts,” said John Scannell, Chairman and CEO. “In the face of these challenges, we delivered solid earnings and record cash flow. We are projecting a stronger fiscal ’16 with earnings per share of $4.00, up 19% on sales growth of about 2%.”
This was a tough year for Moog. Earnings-per-share fell from $3.52 to $3.35. Sales fell 4.6% to $2.53 billion.
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Eddy Elfenbein is a Washington, DC-based speaker, portfolio manager and editor of the blog Crossing Wall Street. His Buy List has beaten the S&P 500 by 102% over the last 17 years. (more)
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