Mebane Faber Reveals Asset Classes Poised for Massive Gains
Mebane Faber, co-founder and the Chief Investment Officer of Cambria Investment Management, has authored a post at his investing blog discussing the concept of mean reversion and what it could mean for several downtrodden asset classes. Faber sees an unusual market set-up indicating the possibility of 40% – 96% gains in commodities and emerging markets based on his historical research.
Imagine a rubber band. If you stretch it only slightly then let it go, it’s not going to shoot very far. On the other hand, if you stretch the rubber band to its full elasticity then release it, it’s going to rocket across the room.
History suggests we’re about to see some asset classes rocket across the room.
Faber goes through the numbers to back up his claim:
Three down years in a row from one asset class is still quite rare. It has only happened six times across 378 total years, or less than 2% of the time. But when it happens the returns are impressive:
1. 30 Year Bonds 1978-1980. A two-year return of 48%
2. US, Foreign, Emerging Stocks 2000-2002. Two-year returns of 43%, 69%, 96%, respectively.
(For those of you counting, yes, that’s just four of the six occurrences. The remaining two are happening now, which we’ll get to in just a moment.)
Faber proceeds to discuss the even greater returns observed when asset classes are down four and five years in a row, along with the data on specific countries, sectors, and industries.
1. Countries down three years in a row returned 56% over the ensuing two years. If down four years in a row, it bumps to 74%. Five years in a row? 135%.
2. For sectors, we find three down years returns 60% over the ensuing two years. Four years jumps to 91%. Five years returns, 138%
3. For industries, down 3 years = 59% returns; down 4 years = 80% returns; and five straight down years returns 105% over the ensuring two years.
The full article is available at this link: Meb Faber Research
Faber has previously identified cheap country ETFs based on analysis of the CAPE ratio (link).