Why We Built It: To Keep Your Losses Small.
Every investor wants to earn a return on their money. They look for those investments that provide the most potential upside. How much can I make? Unfortunately, they don’t always think about how much they might lose. The latter is far more important, and here’s why.
It’s common for investors to think that if they lose 20% on an investment, they’ll need a 20% gain in order to get back to even. That’s not true; you’ll actually need 25%. And if you lose 50%, you’ll need 100% in future returns just to get back to even.
Below is a chart that illustrates the point across a variety of hypothetical declines. It shows just how much your portfolio needs to grow in order to offset a previous decline.
Our Business Cycle Indicator is designed to keep your losses small, so your portfolio will spend more time growing and less time recovering.
What it does: Predicts Recessions, Not Markets
Recessions are reoccurring events and a natural part of economic cycles. Recessions are periods when the overall economy stops growing and actually begins to shrink. Unfortunately, they also produce significant declines in the stock market.
Below is a list of each recession dating back to the Great Depression and the subsequent decline in the S&P 500. The last two recessions, 2001 and 2008, produced roughly 50% declines in the stock market. While larger than the average 32% decline, they were mild compared to the 85% decline experienced during the Great Depression.
S&P 500 Peak to Trough During Recessions
In order to recoup the 85% loss experienced during the Great Depression, the stock market had to climb 567% just to get back to where it was before the crash. The recovery took nearly 25 years.
Keep in mind, not all declines in the stock market are associated with recessions. The stock market fluctuates for countless other reasons. However, historically the largest declines occur during recessions. So, what if you could avoid just those declines that occur during recessions?
Business Cycle Indicator
Our proprietary Business Cycle Indicator was developed in 2014 and uses a combination of economic data that track changes in interest rates, corporate finance, and employment. By combining all three components, we’ve developed a process that can predict recessions. The indicator has been tested using data back to 1968 and it would have predicted each of the last 7 recessions with an average lead time of 13 months.
|Recession Start||Business Cycle Indicator Warning||Lead Time in Months||Lead / Lag|
|Average Lead Time||13||Lead|
|Success Rate||7/7 (100%)|
Business Cycle Indicator and Market Returns: Proof of Concept
In this section we take the data in the tables above, and display them in two charts to provide a better understanding of how our Business Cycle Indictor aligns with recessions. The first shows each recession since 1968. Recessions are the periods of time that are shaded in gray.
Below is the same chart as the one above, but this time we overlay the periods when our Business Cycle Indicator is warning of a recession. Periods when the US Economy is in a recession are shaded in gray, while periods when our Business Cycle Indicator is warning of a recession are shaded in blue. Note that prior to each recession, our Business Cycle Indicator has already provided a early warning of the coming recession.
Lastly, we apply a simple test to determine if our Business Cycle Indicator can be used to achieve better investment results. In this test, we simply have two investment options; the S&P 500, and the 3-Month Treasury Bill. If our Business Cycle Indicator is not providing a recession warning, the time periods not shaded in blue in the above chart, we’ll own the S&P 500. However, if our Business Cycle Indicator is warning of a recession, the periods shaded in blue above, we own 3-Month Treasury Bills.
Proof of Concept Results (1968 – 2016)
The cumulative return of the S&P 500 during this time was 2,282%, while our hypothetical S&P 500 or T-Bill portfolio delivered a cumulative return of 9,703%. That’s more than 4 times the return of the S&P 500 by simply avoiding the stock market when our Business Cycle Indicator is warning of a recession.
Based on these results, we’re confident that our Business Cycle Indicator can help investors avoid the significant declines that often occur during recessions.
Visit our portfolios page to see how our Business Cycle Indicator can improve your investment results.
Due to its proprietary nature, we don’t share the underlying components or the formula used to construct our Business Cycle Indicator. Want more information? Call us at (800) 974-2805.