This is not an endorsement for market timing. For those who may subscribe to tactical allocation, perhaps this rule- of- thumb might be of interest. First, recall Mr. Bogle wrote this in one of his classics, Bogle on Mutual Funds:
"Another sort of tactical allocation strategy involves changing the stock / bond ratio based on the relative outlooks for the respective financial markets. But since no one can ever be sure of the future path of the financial markets, the tactics I recommend would place severe restrictions on the extent of the allocation changes. Specifically, I would vary the desired strategic balance by no more than 15 percentage points on either side. A portfolio targeted at 50/50 would never have less than 35% in stocks nor more than 65%."
Since there is a connection between stock earnings and the "outlook" for the economy as Mr. Bogle implies, there is an easy- to- track indicator that can give us hints. I am watching what Ms. Yellen and her Fed committee "does", not what they "say". The yield curve
can give us some pretty good signals about when recession might occur and when stocks may turn south.
Every recession over the past 50 years was preceded by the Fed hiking short-term rates enough to "invert" the yield curve. It has happened seven out of seven times. Paraphrasing Cliff Asness of AQR, 'if you can find something in the investing world that happens 2 out of 3 times, it is worth considering.' The most popular way of tracking the yield curve is to monitor the spread between the 3-month T-bill and the 10-year note. The yield curve "inverts" when the yield on the 3-month T bill is higher than the 10- year T-Bond.
Rule of thumb:
a recession occurs within several months of yield curve inversion. We can follow the yield curve from the comfort of our own homes. The components of the yield curve ( 3mos & 10 year) can be tracked here:
http://www.treasury.gov/resource-center ... data=yield
As we can tell from the table, it will take quite a few short-term rate increases before short- term rates are equal to the 10 year T-Bond. In the meantime, the majority of us should stick with our "sleep well at night" stock allocations, and ride out the volatility.
FYI...There are many academic papers that can be Googled on this topic, some research actually done by the Fed, that point out the strong connection of the yield curve and economic recession. This is just one of many papers...
http://www.newyorkfed.org/research/curr ... /ci2-7.pdf
"Jaw-boning" like this week's statement by Chair Yellen may be one of the Fed's softer techniques to keep bubbles from blowing, but she needs to actually increase short- term rates enough to flatten the yield curve before I will pay much attention.
Disclaimer: As Buffett has said, " If history all there was to investing, librarians would be millionaires." William Bernstein counsels before deciding on a stock allocation to always ask one's self "how much can I afford to lose?
Disclosure: I will never be 100% out of stocks, but do subscribe to tactical allocation based on advice from Ben Graham and Mr. Bogle. I am currently 50%-S / 50%-B ( Graham recommend T-A-A in a slightly wider 25% -75% range ).
“Everyone is a disciplined, long-term investor until the market goes down.” – Steve Forbes