Behavioral Measures of Expected Market Returns

Presentation Summary:

The impact of investor behavior on equity pricing has been extensively investigated. The conclusion is that investor behavior significantly impacts individual as well as market-wide equity returns. This study adds to the behavioral investing literature by introducing Strategy Market Barometers that are based on the extent to which investors are currently rewarding one equity strategy over another. We find that combining US and International Strategy Market Barometer measures with Baker & Wurgler’s (2006) Sentiment Index, and other variables, explains 13% to 30% of subsequent S&P 500, Russell 2000, and EAFE annual return variability. Results are statistically and economically highly significant. In several cases, the annual subsequent return advantage of the top 16% over the bottom 16% sentiment and strategy index values reaches an astonishing 37% per annum. These results cannot be explained by trailing market returns nor changing economic conditions. Thus Strategy Market Barometer and Sentiment Index behavioral measures are predictive of future market returns and therefore provide a measure of expected market returns.

Speaker: Dr. C. Thomas Howard

Dr. Howard is co-founder of AthenaInvest, a Greenwood Village-based SEC Registered Investment Advisor. He led the research project that resulted in Strategy Based Investing, the methodology which underlies AthenaInvest’s investment approach. He oversees Athena’s ongoing research, which has led to a number of industry publications and conference presentations. Dr. Howard currently serves as CEO, Director of Research, and Chief Investment Officer at Athena.

Dr. Howard is a Professor Emeritus at the Reiman School of Finance, Daniels College of Business, University of Denver, where for over 30 years he taught courses and published articles in the areas of investment management and international finance. For many years he presented stock analysis seminars throughout the US for the American Association of Individual Investors, a national investment education organization headquartered in Chicago. Dr. Howard has been a guest lecturer at SDA Bocconi, Italy’s leading business school and at Handelsho/jskole Syd in Denmark and was a 2004 Summer lecturer in international finance at EM Lyon in France.

He consulted with a number of firms, most recently First Data Corp and Janus Capital Group, and served for 10 years on the Board of Directors for AMG National Trust Bank N.A., a financial counseling and investment management firm headquartered in Denver.

After receiving his BS in Mechanical Engineering at the University of Idaho, Dr. Howard worked three years for Proctor Gamble as a production and warehouse manager. He then entered Oregon State University where he received an MS in Management Science after which he received a Ph.D. in Finance from the University of Washington.

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