Those in their 20s - 40s can be more sanguine about a bear market. Retirees don't have that luxury.
How concerned should you be that the Index of Leading Economic Indicators has declined for four straight months—and is now trading below its six-month moving average?
The LEI was created in 1959, so we now have 60 years of monthly data for it. I fed those monthly values into my PC’s statistical software, and measured the correlations between its trailing returns and the S&P 500’s SPX, +0.49% subsequent returns. I focused on returns over periods as short as three months and as long as three years.Consider the S&P 500’s average gains subsequent to months in which it dropped from being previously above its six-month average to being below.
Are you surprised that the LEI won’t help you much in sidestepping bear markets? You shouldn’t be. The stock market’s level at any given time reflects the collective bets of millions of investors, and an impressive body of academic research has found that it does a better job than almost anyone or anything in translating all publicly-available information into a bet about the future.
Specifically, Deluard assumed that this hypothetical investor is fully invested in stocks if the subsequent quarter’s GDP growth is higher than in the immediately preceding one, and otherwise 100% in cash. Believe it or not, according to his calculations, this investor would have lagged a buy and hold by 1.0 annualized percentage points from 1948 through early 2018.
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