The World According to Ned Davis Research

I have written several times on this blog about Ned Davis Research (NDR). Started by (surprise) Ned Davis in the early 1970's, the firm has expanded to four different office locations, including one here in Boston.

NDR's specialty is research targeted to institutional investors, driven by a vast amount of data. It produces something like 15,000 different charts covering stocks, bonds, commodities, etc. on both the U.S. and global markets.

In any event, I went to an NDR breakfast meeting this morning, where one of their senior analysts shared a number of insights from their recent research efforts.

Overall, NDR remains positive on the outlook for stocks, particularly relative to bonds.

That said, they are concerned about the outlook for stocks in 2011. Their data indicates that stocks typically have a strong 12 month return after the end of a recession (they figure the recession ended in June 2009). After that, however, returns are much more modest.

In general they favor large cap stocks versus small cap, and value stocks versus growth.

Other insights:

1. Correlations among stocks are at near record levels. Currently the correlation between all stocks in the S&P 500 is 0.80 compared to 0.56 on average (NDR's data goes back to the late 1960's). This has meant that there has been little opportunity to add value to portfolios through stock picking - beta has been key;
2. Although NDR remains modestly overweight relative to their benchmarks in equities, they are becoming more defensive in their sector allocation. They are finding value in areas like consumer staples, health care, and energy;
3. NDR's data also indicates that shifting to dividend-paying at this point in the cycle makes sense. This is consistent with their view of becoming more defensive;
4. They also like gold, and gold stocks, as part of their portfolio strategy.

The big problem for the market and the economy is the huge debt burden that continues to weigh on just about every sector of the economy. There are only a few ways to repay debt, as we all know, but none of these are conducive to a stronger economy.

NDR is still bullish on emerging markets, which was a little surprising to me given their cautious market views. However, they argue that the emerging stock market correlations have become more in-tune with the global markets, and the combination of strong growth and attractive valuations makes the emerging markets worthwhile investments.

Finally, I should note that I do not agree with NDR's views on gold. It seems to me that bulk of the upward move in gold occurred in the 1970's, when gold moved from $35 an ounce in 1971 to $850 in 1980. Gold is at $1,200 now, but this implies a very meager return for the last 30 years. Moreover, you can't spend gold on living expenses - it's only worth what someone else will be for it.