- The average of S&P500 for March-2020 was 2652. A 12% decline, or 325 point drop, would bring it to 2327, the end of March level of the long-term trend line.
- A recession appears to be imminent. Stocks could lose up to 50% if the S&P reaches the lower prediction band line of the long-term trend.
- If the percentage decline matches the loss during 2009-09 recession then the S&P500 could reach a low of 1560, a decline of about 35% from the current value.
- The Shiller Cyclically Adjusted Price to Earnings Ratio (CAPE) is at a level of 24.5, almost identical to the 35-year moving average (MA35) of the CAPE of 24.3.
- The CAPE-MA35 ratio is 1.01, forecasting a 10-year annualized real return of 7.9%. Should the CAPE-MA35 ratio decline further then 10-year forward returns will be higher.
- For what is considered to be a lagging indicator of the economy, the unemployment rate provides surprisingly good signals for the beginning and end of recessions.
- This model, backtested to 1948, reliably provided recession signals.
- The model, updated with the March 2020 rate of 4.4%, does now signal a recession.
- A reliable source for recession forecasting is the unemployment rate (UER), which can provide signals for the beginnings and ends of recessions.
- The February 2020 UER is 3.5%, signifying that no recession was imminent. However, if the March 2020 UER is 3.9% then a recession will be signaled, according to the model.
- According to the Washington Post more than a million workers are expected to lose their jobs by the end of March, a dramatic turnaround from February.
- Goldman Sachs estimates that 2.25 million Americans filed for their first week of unemployment benefits in the week ending March 20.
- If the number of unemployed rises only by one million than the March UER will be 4.1%, if it rises by 2.25 million it will be 4.9%.
- In February 2018 Vanguard released a set of five actively managed sector ETF’s and one multi-factor ETF. Here we report on the performance of the Momentum Factor ETF (VFMO).
- Shortly after the inception of VFMO we published “Why Not To Invest In Vanguard’s New U.S. Momentum Factor ETF” which demonstrated that Vanguard’s selection criteria for this fund was flawed.
- In the referenced article we stated that it was unlikely that VFMO would show a higher return than the SPDR S&P 500 ETF (SPY) over the year following inception.
- In April 2019 in a follow up article we showed that the actual performance of VFMO since inception was 6.8% lower than that of SPY, confirming the conclusion in the bullet-point above.
- Again, VFMO has underperformed SPY, and we come to the same conclusion for the following year, namely that the one-year return to Feb-2021 will be less than that of SPY.
- For a detailed model description of the system please read the original description and previous update.
- To make this model more user-friendly we will be providing signals for three different version of this model, all updated weekly.
- The models’ holdings alternate between ETF (SPY) and ETF (IEF), being proxies for investments during up- and down stock market periods, repectively.
- The iM-1wk-SuperTimer (SPY-IEF) would have produced an annualized return of 19.9% with a max drawdown of about -10%.
- Appendix 2 shows that a (50%SPY+50%VCIT)-(IEF) strategy reduces drawdowns to -6.2% but would still have achieved an annualized return of 14%.
- The new Federal Reserve Bank of Chicago Brave-Butters-Kelley Indexes ( BBK ) provide useful input for recession forecasting.
- In the past, low estimates of BBK GDP growth related to the respective recessions, this allow the extraction of a recession warning signal from this growth series.
- We combine two BBK indexes with the Conference Board LEI and iMarketSignals’ Business Cycle Index BCIg to derive our Long Leading Index (iM-LLI) for the US economy.
- Currently neither index signals a recession warning.
- The new Federal Reserve Bank of Chicago Brave-Butters-Kelley Indexes (BBK) provide useful input for recession forecasting.
- We combine two BBK indexes with the Conference Board LEI and our Business Cycle Index BCIg to derive iMarketSignals’ new Long Leading Index (iM-LLI) for the US economy.
- Our analysis shows that the iM-LLI would have provided an average warning signal about eight months before the start of recessions, as observed for the last seven recessions since 1967.
- We are replacing the iM-Composite Index (COMP) with the new iM-LLI.
- Currently this Leading Index is not yet warning of an oncoming recession.
- From November 2019 onward, the Federal Reserve Bank of Chicago is releasing new measures of monthly real GDP growth and its components, the Brave-Butters-Kelley Indexes.
- The data release is for four indicators constructed from a panel of 500 monthly macroeconomic time series and quarterly real gross domestic product growth.
- Our analysis shows that apart from the Leading Index, the other three indicators would have been extremely accurate identifying recessions were it not for the publication time-lag.
- This time-lag makes, on average, these indicators about two month late to signal the start and end of recessions in real-time, as observed for the last seven recessions since 1967.
- Currently none of the Brave-Butters-Kelley Index models are warning of a recession.
- The average of S&P 500 for Dec-2019 was 3166; that is 852 (i.e. 27% of 3166) above the Jan-2020 level of the long-term trend line.
- The Shiller Cyclically Adjusted Price to Earnings Ratio (CAPE) is at a relatively high level of 30.1, and the 35-year moving average (MA35) of the CAPE is at 24.2.
- The CAPE-MA35 ratio is 1.25, forecasting a 10-year annualized real return of 5.9%.
- Investing in equities for the long-haul when the CAPE-MA35 ratio is below 1.30 should produce reasonable returns, as this level of the ratio does not indicate an abnormally overvalued market.
- This strategy exploits the anomaly that Cyclical Sectors and Small Caps perform best from November to April, and Defensive Sectors do better from May to October during most years.
- Three identical models starting 6 months apart are used. Each model holds only one ETF for 18 months selected by a simple ranking system from the cyclical and defensive groups.
- The effect of this is that the combination model always has 66% of the portfolio in the “correct” direction, defensive or cyclical, and 33% in the “wrong” direction.
- The combination model trades only twice a year, switching only one position at the end of April and end of October.
- For the approximately 18.5 year period from end of Apr-2000 to Sep-2019 the backtest showed an annualized return of 12.3% with a maximum drawdown of -24%.
With reference to Section 202(a)(11)(D) of the Investment Advisers Act:
We are Engineers and not Investment Advisers,
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