Recently, a publication has been circulating with the title “Periods When to Make Money”. It alludes to the fact that 2023 is tagged as a year “when to make money,” which is why people are extremely excited about it (and repost it on social media). This is especially interesting when you consider that the S&P 500 Index is 9.6% up on a YTD basis. ¹ In this article, I will analyze how well these predictions have worked in past cycles.

Periods When to Make Money

Market timing for bull and bear cycles is an extremely hard task and (probably) impossible to do consistently over time. This led to the “Timing the Market vs. Time in the Market” argument where some claim that a buy-and-hold strategy of staying invested in the market beats the strategy of trying to predict market downturns and recoveries.

It is human nature to make predictions, and humans tend to prefer simplicity over complexity. In this sense, having a chart showing different dates defining market cycles is far more attractive than having a complex model with multiple variables that must be regularly fed with new data. This is why the chart named “Period When to make Money” by George Tritch is gaining such a buzz in 2023. At least that’s my take. Note: right-click in “Open image in new tab” to zoom in.

Source: ritholtz.com

The chart shows three types of years:

A. Years of panic, in which big losses are expected

B. Years of good times, when it is suggested to sell owned stocks

C. Years of hard times, when buying stocks is recommended

At first glance, there are some interesting years, such as recommending selling in 1927 (before the Great Depression), 1999 (before the dotcom bubble), 2007 (before the Great Financial Crisis) and 2019 (before Covid-19). Most importantly, the chart suggests buying stocks in 2023 while the S&P 500 Index is 9.6% up on a YTD basis. ² Therefore, in the next sections, we will see how the stock market has performed in these cycles and compare the market timing strategies using this chart with the classic buy-and-hold strategy.

Market Performance during Highlighted Cycles

In this section, we will see how the stock market has performed in periods C to B (from “Years of Hard Times” to “Years of Good Times”), C to A (from “Years of Hard Times” to “Years of Panic”), and A to C (from” Years of Panic” to “Years of Hard Times”). For the stock market, we use the S&P 500 Index based on price data from Robert Shiller’s online data site at Yale University.

Source: Robert J. Shiller Online Data. Period: January 1877 - April 2023. Past performance is not indicative of future results. It is not possible to invest directly in an index. Exposure to an asset class represented by an index may be available through investable instruments based on that index.

In this first chart, we see that 81.25% of the periods indicated produced positive results. The average performance over these periods was 32.12%, with the highest return of 103.24% between 1996-1999 and the lowest of -42.05% between 1931-1935, during the Great Depression. In that sense, the predictions were able to avoid the market crash of 1929, but not the entire impact of the subsequent bear market.

Source: Robert J. Shiller Online Data. Period: January 1877 - April 2023. Past performance is not indicative of future results. It is not possible to invest directly in an index. Exposure to an asset class represented by an index may be available through investable instruments based on that index.

In the periods between the years of hard times and years of panic, which are longer and occur less frequently, the hit rate is even higher, reaching 87.5%, with only one timeframe showing negative results (1888-1891: -8.85%). Also, the average return of 61.66% is almost twice as high as in the previous chart. This is not surprising since the periods are much longer and the number of timeframes is half that of the previous chart (8 vs. 16).

Source: Robert J. Shiller Online Data. Period: January 1877 - April 2023. Past performance is not indicative of future results. It is not possible to invest directly in an index. Exposure to an asset class represented by an index may be available through investable instruments based on that index.

Finally, we come to the periods of panic and the time when the market is expected to deliver negative results. This seems to be the Achilles heel of this cycle forecast proposal. The hit rate is as low as 37.5% and the average performance is positive at 17.29%. While the market performance in these periods is lower than the two previously analyzed, it is still positive. Thus, being out of the market during these periods would result in missing the extremely strong performance of the 1945-1951 (57.23%) and 2019-2023 (51.9%) periods.

These results underscore the discussion of “Timing the Market vs. Time in the Market”. In the next section, we will compare the buy-and-hold strategy to three different strategies using the three time points just analyzed (A, B, and C).

Timing the Market vs. Time in the Market

To get a clear picture of the performance of the proposal presented in “Periods When to Make Money”, we need to backtest it against the buy-and-hold strategy (always long the market). Thus, three strategies are presented:

1. Buy in C (Hard Times) and Sell in B (Good Times)

2. Buy in C and Sell in A (Panic Times) during long cycles and Sell in B during short cycles

3. Buy in C and Short-Sell in A during long cycles and Sell in B in short cycles

The first strategy is to invest only during the short cycles that appear in George Tritch’s leaflet and to hold only long positions (no short-selling). Then, the second strategy describes investing during long cycles when they occur, and short cycles when there are no long cycles, and also only holding long positions. Finally, the third strategy is like the second, but adds short positions between the years of panic and the years of hard times (A-C timeframes).

Source: Robert J. Shiller Online Data. Period: January 1904 - April 2023. Past performance is not indicative of future results. It is not possible to invest directly in an index. Exposure to an asset class represented by an index may be available through investable instruments based on that index.

As can be seen from the chart above, the idea of “Time in the Market” beats “Timing the Market” by a wide margin. Of the three strategies described, strategy number 2 performs best because it is more time invested and does not hold short positions during expected panic phases. However, starting with a hypothetical $100 in 1904, strategy 2 would get to $5,432 by April 2023 versus $62,414 for the buy-and-hold strategy. That’s a 12-fold drop in performance! Even though strategy 2 appears to have been able to limit market drawdowns, namely in 1937, 2000 and 2008, the decline in overall performance is simply too great.

In looking at strategies 1 and 3, we found that strategy 3 was the worst performer. These results should not be surprising given our conclusions from the table “Performance from Years of Hard Times to Years of Panic”, where it had a very low hit rate. As far as strategy 1 is concerned, the drawback seems to be the amount of time it stays out of the market. As the market entered a large upward trend a few years after World War II, it is evident that the opportunity cost of being uninvested was simply too high to opt for market timing.

All in all, while George Tritch’s “Periods When to Make Money” seems to point to some years that are close to historical market crashes, it does not get close enough to them. This result may be related to the fact that the end of a bull run coincides with the time of more pronounced returns. Moreover, in many cases, the market recovered quickly from its bottom (as in the Covid-19 stock market crash), compensating investors who were able to endure those “years of panic”.

Last note on the creator: George Tritch or Samuel Benner

Looks like there is a discussion on the creator of these cycle patterns. The discussion is based on George Tritch having created in 1872 or Samuel Benner in 1875. In the leaflet from Tritch we see that it was compiled in 1872 but the copyright came after in 1883, while Benner published his book “Benner’s Prophecies of Future Ups and Downs in Prices” in 1875.

Sources

¹ Source: Google Finance as of 19 May, 2023. Past performance is not indicative of future results. It is not possible to invest directly in an index. Exposure to an asset class represented by an index may be available through investable instruments based on that index.

² Source: Google Finance as of 19 May, 2023. Past performance is not indicative of future results. It is not possible to invest directly in an index. Exposure to an asset class represented by an index may be available through investable instruments based on that index.

Data Source:

Robert J. Shiller Online Data. Stock Market Data Used in “Irrational Exuberance” Princeton University Press, 2000, 2005, 2015, updated. Data obtained from: http://www.econ.yale.edu/~shiller/data.htm

Note on S&P 500 Inception: S&P 500 launch date was March 4, 1957.

Code Source: GitHub Page

Cover Image Credits: © Pietro Zuco/ ID: 8207487431 / Flickr.com

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