The strategy proposed here is to always invest in sector equity ETFs. I defined two super-sector groups, classified as aggressive and defensive, each with four sector ETFs which have historically performed best from November to April and relatively well from May to October, respectively.
The “golden-cross trigger” has been a reliable guide to equity investment. But it is not that good – since 1990, there were many periods when it would have been better to ignore its signals. One can do much better with a simple improvement by including a recession indicator.
The seasonal effect, namely that equities do better from November through April, is well-known. This article provides a rigorous statistical test of the effect and a trading strategy that profits from it.
A recession in the U.S. economy is not imminent. The economy is still in the expansion phase of this business cycle, which has lasted already 116 months (as of February 2019), and will probably become the longest on record since 1958 by July this year.
I compare the performance of the Vanguard LifeStrategy Moderate Growth Fund (VSMGX), which holds static investments of 60% equity and 40% bond funds, with a model holding identical assets, but which switches to 100% bond funds during equity down-market periods.
Stocks perform poorly when inflation is on the rise. The empirical data is supported by theory. Rising inflation means that interest rates are increasing and the discounted value of future cash flows is driven down, lowering equity prices. Let’s see if we can use the inflation rate to improve equity performance.
I developed a methodology that uses valuations based on a 35-year moving-average of the CAPE ratio instead of its long-term mean. It predicts a 10-year annualized real return of 5.8%, similar to the long-term market trend value of 5.4%.
The Shiller CAPE ratio is typically regarded as a stock market valuation measure. But the CAPE itself is not a good stock market timer. However, it can be indirectly used for market timing by determining a cycle-ID as formulated by Theodore Wong.