As the US economy nears what is certain to be the longest economic expansion in history, many investors are looking for an indication of future turbulence. Despite universally high valuations in 2018, US equities have shrugged off risks posed by tariffs, currency crises in emerging markets, and tightening US monetary policy. Can share prices continue to be resilient?
In this paper, we attempt to identify major market cycle peaks and troughs using the ratio of Industrial vs. Consumer Staples stock performance. We find that the percentile ranking of this ratio is correlated with forward equity returns. In addition, we observe that intersecting the Industrials/Staples ratio with a credit spread indicator, further refines the efficacy of our conclusions from a market timing perspective.
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