Sep

7

In the table below, I have classified August to December returns for the past 27 years into 3 groups. A positive differential (Forward Earnings yield - 10 yr yield) has boded well for stocks. The current differential is about 2 percent, so the expected return is greater than 5 percent. Note that the unconditional mean is 3.89 percent for the last 4 months of the year, so the results are not as statistically impressive on that basis.

Also note that since 1979: when the differential has been greater than 0, the S&P has never dropped more than 4 percent (ignoring draw-downs) from August 31st to December 31st.

      GROUP        AVG        STD           N       T     %POS     MAX     MIN
     DIFF < 0      0.07%     12.26%    9      0.02    67%     14%     -25%
0 > DIFF > .01   5.38%     9.96%     9      1.62    78%     28%     -4%
     DIFF > .01   6.22%     7.08%      9      2.64    78%     18%     -4%
     ALL             3.89%     10.00%    27     2.02    74%     28%     -25%


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