Volatility of Monthly Returns of Timken Compared to the Vanguard S&P 500 Index ETF

Here is the graph of monthly returns between June 2019 and September 2022 of Timken (TKR) plotted against Vanguard S&P 500 Index ETF (VOO):

Exhibit: Monthly Returns of VOO and TKR between June 2019 and September 2022

Monthly Returns of VOO and TKR between June 2019 and September 2022
(Source: Data Provided by IEX Cloud, Monthly Returns Calculated in Microsoft Excel, Graph Plotted in R Studio using ggplot package)
Click on the image to enlarge it.

The monthly returns of Timken have a very strong positive correlation of 0.77 with the S&P 500 Index. The very low p-value (p = 6.2e-09) indicates that the monthly returns of the S&P 500 Index have an effect on Timken's monthly returns.  

The Beta value indicates the monthly return volatility of Timken compared to the S&P 500 Index. Yahoo Finance provides a Beta value of 1.59 based on monthly returns over the past five years. A linear regression of the monthly returns between June 2019 and September 2022 yields a Beta of 1.48. The coefficient of Vanguard's monthly return is the volatility of Timken. The coefficient is the linear regression line's slope and Timken's Beta value. In other words, as the monthly return of the Vanguard S&P 500 Index ETF changes by 1%, Timken's monthly return can change by an average of 1.48%.  

Timken's Beta value is one of the highest I have seen. Here are the Beta values of some of the stocks in another post on this blog.  

Here's the output of the linear regression between the monthly returns of Vanguard S&P 500 Index ETF and Timken:

Call:

lm(formula = TKR_Monthly_Return ~ VOO_Monthly_Return, data = VOOandTKR)

Residuals:

      Min        1Q    Median        3Q       Max 

-0.132602 -0.047815 -0.000585  0.059694  0.137770 

Coefficients:

                   Estimate Std. Error t value Pr(>|t|)    

(Intercept)        0.001198   0.011348   0.106    0.916    

VOO_Monthly_Return 1.489061   0.199966   7.447 6.17e-09 ***

---

Signif. codes:  0 ‘***’ 0.001 ‘**’ 0.01 ‘*’ 0.05 ‘.’ 0.1 ‘ ’ 1

Residual standard error: 0.07103 on 38 degrees of freedom

Multiple R-squared:  0.5934, Adjusted R-squared:  0.5827 

F-statistic: 55.45 on 1 and 38 DF,  p-value: 6.168e-09  

  

Boeing's Monthly Return Volatility Compared to the Vanguard S&P 500 Index ETF From June 2019 to August 2022

 Given its dominant position in the aerospace market, one would think Boeing's (BA) monthly returns would be less volatile than the S&P 500 index (VOO). But, Boeing has endured a lot in the past few years. First came the trade war with China that froze Boeing out of the second-largest aerospace market in the world.  Then came the COVID-19 pandemic that grounded airlines worldwide and brought Boeing to its knees. We did not even talk about the 737 Max plane crash in Ethiopia that kicked off the disastrous few years for Boeing.  

Boeing has never fully recovered from either the trade war or the pandemic. Boeing remains frozen out of the Chinese market, and airlines are only now seeing air travel return close to pre-pandemic levels (Exhibit 1).

Exhibit 1: TSA Checkpoint Travel Number September 17, 2022 - September 26, 2022

TSA Checkpoint Travel Numbers (Source: TSA.GOV)

Now, the world is grappling with slowing growth due to high inflation and interest rates, which is putting further pressure on Boeing. By the looks of it, Boeing stock may take a decade or more to recover its losses if it ever recovers. Boeing's stock has dropped from $440 in March 2019 to $127 as of September 27 - a loss of 71%.  

Due to these massive crises, Boeing's stock returns have become unhinged from that of the S&P 500 index. A linear regression of the monthly returns of the Vanguard S&P 500 Index and Boeing yields a very high beta of 1.35 (slope of the regression line). The value of 1.35 is the coefficient of the monthly returns of the Vanguard S&P 500 Index ETF (VOO).  Yahoo Finance displays a beta of 1.36 based on 5-year monthly returns.  One can expect any change in the Vanguard ETF to be magnified by Boeing.  For every 1% change in monthly returns of the S&P 500 index, Boeing's monthly returns are expected to change by 1.35%. Also, just 25% (Adjusted R-Squared in the RStudio output below) of Boeing's returns are explained by the monthly returns of the S&P 500 Index.  

Exhibit: Vanguard S&P 500 Index ETF and Boeing Monthly Returns [June 2019 - August 2022]

Vanguard S&P 500 Index ETF and Boeing Monthly Returns [June 2019 - August 2022]
(Source: Data Provided by IEX Cloud, Author Calculations Using RStudio)

Here's the output from the linear regression conducted on RStudio: 

> lmBAVOO = lm(BA_Monthly_Return~VOO_Monthly_Return, data = VOOandBA)

> summary(lmBAVOO)

Call:

lm(formula = BA_Monthly_Return ~ VOO_Monthly_Return, data = VOOandBA)

Residuals:

     Min       1Q   Median       3Q      Max 

-0.26036 -0.07433 -0.00562  0.07323  0.33452 

Coefficients:

                   Estimate Std. Error t value Pr(>|t|)    

(Intercept)        -0.02348    0.02007  -1.169 0.249682    

VOO_Monthly_Return  1.35442    0.36247   3.737 0.000628 ***

---

Signif. codes:  0 ‘***’ 0.001 ‘**’ 0.01 ‘*’ 0.05 ‘.’ 0.1 ‘ ’ 1

Residual standard error: 0.1229 on 37 degrees of freedom

Multiple R-squared:  0.274, Adjusted R-squared:  0.2543 

F-statistic: 13.96 on 1 and 37 DF,  p-value: 0.0006279

      

    

 

  

 

 

Linear Regression of Monthly Returns of Sealed Air Corp and the Vanguard S&P 500 Index ETF

Sealed Air Corporation is a global provider of packaging solutions to various industries. The company provides various packaging products to pack red meat, medical and life science products, cheese, electronics, and other products.  

Exhibit: Sealed Air Corporation Revenue by Region and Product Type

(Source: Sealed Air Q2 FY 2022 Investor Presentation on August 2,2022)

Sealed Air has very high volatility. This high volatility may be due to heavy dependency on consumer spending. If consumer spending is weak, they may buy less packaged red meat or packaged cheese, resulting in reduced revenue for the company.  

Here is the graph of monthly returns of Sealed Air (SEE) plotted against Vanguard S&P 500 Index ETF (VOO):

Exhibit 1: Monthly Returns of Sealed Air Corp. and Vanguard S&P 500 Index ETF [June 2019 -  August 2022]

Monthly Returns of Sealed Air Corp. and Vanguard S&P 500 Index ETF [June 2019 -  August 2022]

(Source: RStudio, ggplot, Data Provided by IEX Cloud)

Results of the linear regression of monthly returns of Sealed Air Corporation against Vanguard S&P 500 Index ETF:

> lmSEEVOO = lm(SEE_Monthly_Return~VOO_Monthly_Return, data = VOOandSEE)

> summary(lmSEEVOO)

Call:

lm(formula = SEE_Monthly_Return ~ VOO_Monthly_Return, data = VOOandSEE)

Residuals:

     Min       1Q   Median       3Q      Max 

-0.13572 -0.03866  0.01319  0.03375  0.14587 

Coefficients:

                    Estimate Std. Error t value Pr(>|t|)    

(Intercept)        -0.002498   0.009056  -0.276    0.784    

VOO_Monthly_Return  1.144479   0.163536   6.998 2.85e-08 ***

---

Signif. codes:  0 ‘***’ 0.001 ‘**’ 0.01 ‘*’ 0.05 ‘.’ 0.1 ‘ ’ 1

Residual standard error: 0.05547 on 37 degrees of freedom

Multiple R-squared:  0.5696, Adjusted R-squared:  0.558 

F-statistic: 48.98 on 1 and 37 DF,  p-value: 2.849e-08

Sealed Air Corporation has a higher volatility than the S&P 500 Index, with a Beta of 1.144. The company's monthly returns positively correlate with the Vanguard S&P 500 Index ETF. The correlation is 0.75.  

The linear regression yields an adjusted R-squared of 0.55, indicating that about 55% of Sealed Air's monthly returns can be explained by the monthly returns of the S&P 500 Index. 

Sealed Air stock may be risky due to its high volatility compared to the market. But, if the stocks are bought at a reasonable or low valuation, they may yield returns that exceed the market's return.   

     

Linear Regression of Monthly Returns of Cisco Systems and the Vanguard S&P 500 Index ETF

Here is the graph of monthly returns of Cisco Systems (CSCO) plotted against Vanguard S&P 500 Index ETF (VOO):

Exhibit 1: Monthly Returns of Cisco Systems and Vanguard S&P 500 Index ETF [June 2019 -  August 2022]

Monthly Returns of the Vanguard S&P 500 Index ETF and Cisco Systems Inc.

(Source: RStudio, ggplot, Data Provided by IEX Cloud)

Results of the linear regression of monthly returns of Cisco Systems against Vanguard S&P 500 Index ETF:

VOOandCSCO <- read_excel("/CSCO_VOO_LM_September_2022.xlsx", sheet = "Sheet1")

lmCSCOVOO = lm(CSCO_Monthly_Return~VOO_Monthly_Return, data = VOOandCSCO)

summary(lmCSCOVOO)

Call:

lm(formula = CSCO_Monthly_Return ~ VOO_Monthly_Return, data = VOOandCSCO)

Residuals:

      Min        1Q    Median        3Q       Max 

-0.156924 -0.031998 -0.008248  0.038045  0.127839 

Coefficients:

                   Estimate Std. Error t value Pr(>|t|)    

(Intercept)        -0.01062    0.01049  -1.012    0.318    

VOO_Monthly_Return  0.91708    0.18946   4.841 2.31e-05 ***

---

Signif. codes:  0 ‘***’ 0.001 ‘**’ 0.01 ‘*’ 0.05 ‘.’ 0.1 ‘ ’ 1

Residual standard error: 0.06426 on 37 degrees of freedom

Multiple R-squared:  0.3877, Adjusted R-squared:  0.3712 

F-statistic: 23.43 on 1 and 37 DF,  p-value: 2.306e-05

The slope of the regression corresponds to the beta of the stock. In this case, Cisco Systems has a beta of 0.91. 

The adjusted R-squared is 0.37. About 37% of Cisco's monthly return is explained by the returns of the S&P 500 index.  

Cisco Systems cannot protect a portfolio against market volatility since it has a beta value close to 1. Cisco's stock will almost entirely reflect the volatility in the market.      

 

Linear Regression of Monthly Returns of Colgate-Palmolive against Vanguard S&P 500 Index ETF

Here is the graph of monthly returns of Colgate-Palmolive (CL) plotted against Vanguard S&P 500 Index ETF (VOO):

Exhibit 1: Monthly Returns of Colgate-Palmolive and Vanguard S&P 500 Index ETF [June 2019 -  August 2022]

(Source: RStudio, ggplot, Data Provided by IEX Cloud)

Results of the linear regression of monthly returns of Colgate-Palmolive against Vanguard S&P 500 Index ETF:

> VOOandCL <- read_excel("/CL_VOO_LM_September_2022.xlsx", sheet = "Sheet1")

> lmCLVOO = lm(CL_Monthly_Return~VOO_Monthly_Return, data = VOOandCL)

> summary(lmCLVOO)

Call:

lm(formula = CL_Monthly_Return ~ VOO_Monthly_Return, data = VOOandCL)

Residuals:

      Min        1Q    Median        3Q       Max 

-0.084505 -0.025451  0.002263  0.028820  0.122836 

Coefficients:

                    Estimate Std. Error t value Pr(>|t|)   

(Intercept)        0.0002236  0.0067940   0.033  0.97392   

VOO_Monthly_Return 0.3471172  0.1226847   2.829  0.00749 **

---

Signif. codes:  0 ‘***’ 0.001 ‘**’ 0.01 ‘*’ 0.05 ‘.’ 0.1 ‘ ’ 1

Residual standard error: 0.04161 on 37 degrees of freedom

Multiple R-squared:  0.1779, Adjusted R-squared:  0.1557 

F-statistic: 8.005 on 1 and 37 DF,  p-value: 0.007492

The slope of the regression corresponds to the beta of the stock. In this case, Colgate-Palmolive has a beta of 0.34. 

The adjusted R-squared is 0.15. About 15% of Colgate-Palmolive's return is explained by the returns of the S&P 500 index.  

Colgate-Palmolive can protect a portfolio against market volatility since it has a beta value substantially less than 1.    

 

Linear Regression of Monthly Returns of Lennox International against Vanguard S&P 500 Index ETF

Here is the graph of monthly returns of Lennox International (LII) plotted against Vanguard S&P 500 Index ETF (VOO):

Exhibit 1: Monthly Returns of Lennox International and Vanguard S&P 500 Index ETF [June 2019 -  August 2022 

(Source: RStudio, ggplot, Data Provided by IEX Cloud)

Results of the linear regression of monthly returns of Lennox International against Vanguard S&P 500 Index ETF:

VOOandLII <- read_excel("/LII_VOO_LM_September_2022.xlsx", sheet = "Sheet1")

lmLIIVOO = lm(LII_Monthly_Return~VOO_Monthly_Return, data = VOOandLII)

> summary(lmLIIVOO)

Call:

lm(formula = LII_Monthly_Return ~ VOO_Monthly_Return, data = VOOandLII)

Residuals:

      Min        1Q    Median        3Q       Max 

-0.090246 -0.052733 -0.001907  0.040310  0.108446 

Coefficients:

                    Estimate Std. Error t value Pr(>|t|)    

(Intercept)        -0.010082   0.009416  -1.071    0.291    

VOO_Monthly_Return  0.995050   0.170040   5.852 9.97e-07 ***

---

Signif. codes:  0 ‘***’ 0.001 ‘**’ 0.01 ‘*’ 0.05 ‘.’ 0.1 ‘ ’ 1

Residual standard error: 0.05767 on 37 degrees of freedom

Multiple R-squared:  0.4807, Adjusted R-squared:  0.4666 

F-statistic: 34.24 on 1 and 37 DF,  p-value: 9.966e-07

The slope of the regression corresponds to the beta of the stock. In this case, Lennox International has a beta of 0.995. Lennox's beta is close to the S&P 500 beta, so Lennox will move in line with the market.  

The adjusted R-squared is 0.46. About 46% of Lennox's return is explained by the returns of the S&P 500 index.  

Invest in an Equal-Weight ETF in these Turbulent Times.

The S&P 500 index is market-capitalization-weighted. The weighting by market cap means the companies with the largest market capitalization (Market capitalization = Number of shares outstanding x Share Price) get the highest weight. Last year, this method for calculating the index made the five largest companies by market cap account for 23% of the index. That is just 5 out of the 500 companies accounting for about a quarter of the market capitalization. These five companies were: Apple, Microsoft, Alphabet (Google), Amazon, and Facebook (Meta). When the share price of these companies starts underperforming, the market takes a huge tumble. We can see that happening now. The S&P 500 index (VOO) is down about 9.72% (pre-market on January 28), while the S&P 500 equal-weighted ETF (RSP) is down 7.48% (See Exhibit 1: Invesco Equal-Weight ETF Beats Vanguard S&P 500 Market-Cap Weighted ETF). That is a difference in the performance of 224 basis points. In essence, the equal-weight ETF outperformed the market-cap ETF. The dividend yield is about the same for both ETFs. The Invesco Equal-Weight ETF charges a higher expense ratio than the Vanguard S&P 500 ETF. Invesco charges 20 basis points (bps) or 0.2%, while the Vanguard S&P 500 ETF (VOO) charges three bps or 0.03%. Invesco charges 7x more than the Vanguard ETF. Even after deducting the extra expense of investing in the Invesco ETF, it comes ahead in performance by over 200 bps.  

The era of big-tech is coming to an end due to more regulation and their size inhibiting growth. At least for now, Apple seems to be bucking the trend after reporting blockbuster results yesterday. Interest rates are also rising, putting pressure on valuation because future earnings will be discounted at a higher interest rate. It may be good to have a position in the Invesco Equal-Weight ETF (RSP) during these times. 

     Exhibit 1: Invesco Equal-Weight ETF Beats Vanguard S&P 500 Market-Cap Weighted ETF

(Source: Seeking Alpha)

Also, there may be other equal-weight ETFs in the market. I am aware of Invesco's ETF, so I have invested in it. I am not endorsing the Invesco ETF.