I compare the performance of the Vanguard LifeStrategy Moderate Growth Fund (VSMGX), which holds static investments of 60% equity and 40% bond funds, with a model holding identical assets, but which switches to 100% bond funds during equity down-market periods.
Stocks perform poorly when inflation is on the rise. The empirical data is supported by theory. Rising inflation means that interest rates are increasing and the discounted value of future cash flows is driven down, lowering equity prices. Let’s see if we can use the inflation rate to improve equity performance.
I developed a methodology that uses valuations based on a 35-year moving-average of the CAPE ratio instead of its long-term mean. It predicts a 10-year annualized real return of 5.8%, similar to the long-term market trend value of 5.4%.
The Shiller CAPE ratio is typically regarded as a stock market valuation measure. But the CAPE itself is not a good stock market timer. However, it can be indirectly used for market timing by determining a cycle-ID as formulated by Theodore Wong.