Gains Through Timing The Business Cycle
The stock market is a discounting mechanism. What this means is that stock market investors, in aggregate, do an exceptional job of predicting future recessions. The stock market goes down before recessions, so investors want to switch from stocks to bonds (or cash) before the recession begins. Conversely, investors want to switch from bonds (cash) back to stocks before the recession ends. Switching returns are the excess returns (above the buy-and-hold returns) that an investor gets if he is able to correctly anticipate the start and end of recessions.
| |
-4 month |
-3 month |
-2 month |
-1 month |
At Peak |
+1 month |
+2 month |
+3 month |
+4 month |
| -4 month |
4.8 |
4.0 |
4.2 |
4.1 |
3.3 |
2.7 |
2.1 |
2.2 |
1.9 |
| -3 month |
4.0 |
3.3 |
3.5 |
3.3 |
2.6 |
1.9 |
1.4 |
1.5 |
1.3 |
| -2 month |
3.3 |
2.6 |
2.8 |
2.6 |
1.9 |
1.2 |
0.7 |
0.8 |
0.7 |
| -1 month |
2.5 |
1.8 |
2.0 |
1.8 |
1.1 |
0.5 |
0.0 |
0.1 |
0.0 |
| At trough |
1.9 |
1.2 |
1.4 |
12 |
0.5 |
-0.2 |
-0.7 |
-0.6 |
-0.7 |
| +1 month |
1.5 |
0.8 |
1.0 |
0.8 |
0.5 |
-0.2 |
-0.7 |
-0.6 |
-0.7 |
| +2 month |
1.5 |
0.8 |
1.0 |
0.8 |
0.1 |
-0.6 |
-1.1 |
-1.0 |
-1.1 |
| +3 month |
0.5 |
-0.2 |
0.0 |
-0.2 |
-0.9 |
-1.5 |
-2.1 |
-2.0 |
-2.1 |
| +4 month |
0.3 |
-0.4 |
-0.2 |
-0.3 |
-1.1 |
-1.7 |
-2.2 |
-2.1 |
-2.2 |
Switching Returns (Percent) Minus Buy-and-Hold Returns (Percent) around Business Cycle Turning Points, 1802 through December 2009. Source: Stocks For The Long Run, 4th Edition, Siegel.
