Jim wrote: I didn't really look at what time frame it is the best predictor for. I just picked 18 months and tested it.

I've tested six, twelve, eighteen and twenty-four months. I'm seeing the same message no matter which I choose.

2000  6-Mths               
From  To       From  To    CAGR
0     0.1      1.07  1.37  -13.26%
0.1   0.2      1.37  1.66  1.88%
0.2   0.3      1.66  1.78  13.83%
0.3   0.4      1.78  1.85  8.28%
0.4   0.5      1.85  1.92  9.12%
0.5   0.6      1.92  1.99  8.85%
0.6   0.7      1.99  2.05  12.05%
0.7   0.8      2.05  2.12  11.95%
0.8   0.9      2.12  2.23  15.08%
0.9   1        2.23  3.58  24.23%
                           
2000  12-Mths              
From  To       From  To    CAGR
0     0.1      1.07  1.37  -14.59%
0.1   0.2      1.37  1.66  0.39%
0.2   0.3      1.66  1.78  13.89%
0.3   0.4      1.78  1.85  7.29%
0.4   0.5      1.85  1.92  9.36%
0.5   0.6      1.92  1.99  9.49%
0.6   0.7      1.99  2.05  9.61%
0.7   0.8      2.05  2.12  10.90%
0.8   0.9      2.12  2.23  13.35%
0.9   1        2.23  3.58  23.00%
                           
2000  24-Mths              
From  To       From  To    CAGR
0     0.1      1.07  1.37  -10.02%
0.1   0.2      1.37  1.66  3.82%
0.2   0.3      1.66  1.78  10.57%
0.3   0.4      1.78  1.85  2.35%
0.4   0.5      1.85  1.92  8.86%
0.5   0.6      1.92  1.99  10.35%
0.6   0.7      1.99  2.05  10.36%
0.7   0.8      2.05  2.12  10.62%
0.8   0.9      2.12  2.23  14.54%
0.9   1        2.23  3.58  20.15%

Jim wrote: The implication is not on solid ground: it might not be a causal relationship

I rather doubt it. If there is any cause/effect relationship going on here I would think it is the investor public seeking out yield wherever they can get it. When dividend yields are high they are happy to create demand for securities that offer that higher yield, and that demand in the context of similar supply drives prices higher.

To test this I took 10-Year Treasury rates as a proxy for what one might get for savings. Right now I'm getting 4.35% at Capital One 360. I'm also getting 5.10% from a 1-Year CD at the same bank. The 10-Year is presently 4.27. Of course, this doesn't always work out, but close enough for this test.

The theory is that when rates for safe investment options are good, money remains there safely tucked away in a bank or money market account. When the savings rate is very low investors seek yield elsewhere and are willing to take on more risk in securities.

So for the following table I break up the rate into deciles and baskets of twenty and show the S&P 500 return in each basket from 2000 to present.

2000                    
From  To    From  To    CAGR
0     0.1   0.70  1.74  4.88%
0.1   0.2   1.74  2.03  22.81%
0.2   0.3   2.03  2.34  12.94%
0.3   0.4   2.34  2.63  10.93%
0.4   0.5   2.63  3.04  15.66%
0.5   0.6   3.04  3.62  11.68%
0.6   0.7   3.62  4.11  8.94%
0.7   0.8   4.11  4.50  7.02%
0.8   0.9   4.50  5.00  -3.84%
0.9   1     5.00  6.79  -10.66%
2000                    
From  To    From  To    CAGR
0     0.05  0.70  1.52  8.87%
0.05  0.1   1.52  1.74  -1.51%
0.1   0.15  1.74  1.94  24.09%
0.15  0.2   1.94  2.03  21.08%
0.2   0.25  2.03  2.12  19.24%
0.25  0.3   2.12  2.34  10.36%
0.3   0.35  2.34  2.47  10.63%
0.35  0.4   2.47  2.63  11.25%
0.4   0.45  2.63  2.73  16.66%
0.45  0.5   2.73  3.04  14.76%
0.5   0.55  3.04  3.43  12.69%
0.55  0.6   3.43  3.62  10.52%
0.6   0.65  3.62  3.88  8.45%
0.65  0.7   3.88  4.11  9.60%
0.7   0.75  4.11  4.25  6.63%
0.75  0.8   4.25  4.50  7.42%
0.8   0.85  4.50  4.71  -1.43%
0.85  0.9   4.71  5.00  -6.28%
0.9   0.95  5.00  5.34  -7.53%
0.95  1     5.34  6.79  -13.83%

When you can make a good return in savings money is moved out of securities and into these safe investment options, which by definition, moves money out of securities causing demand to lessen and supply to increase dropping prices.

I'm more comfortable with this explanation, but I'm certainly open to others.

Mechanical Investing FAQ

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