Growth Stock Picking and Monetary Market Timing

In Monetary Market Timing, we saw that it was best to invest in the stock market when the fed policy was accommodating (decreasing interest rates). Let's combine this timing system with Growth mechanical stock picking.

Below is the performances of James O'Shaughnessy's Cornerstone Growth depending on the direction of the Fed Fund Rate as well as the year of the presidential cycle.

Direction of Interest Rates over the past 12 months are checked once at the beginning of the year only: this is much simpler than most monetary market timing systems.


Interest Rates Election Cycle Year Average Return Standard Deviation  
Decreasing Rates 1 37.6% 11.3%
2 27.1% 25.7%
3 28.8% 19.0%
4 31.6% 11.6%
Decreasing Rates, All Years 31.0% 16.6%
Increasing Rates 1 -2.4% 29.7%
2 5.3% 29.5%
3 38.3% 26.4%
4 25.5% 22.0%
Increasing Rates, All Years 15.3% 30%

As you can see, Growth Investing is more rewarding when Interest Rates are decreasing. The average returns are double while standard deviations are almost halved compared to when the fed is increasing interest rates.

Years 3 and 4 provide solid returns even when the fed policy is not accommodating. Combining the monetary market timing system with the presidential cycle, we can conclude that we should avoid Growth Stocks in year 1 and 2 of the presidential cycle if interest rates are increasing.


Note: In Data Driven Investing, the authors looked at which mechanical stock picking strategy (Value, Growth, Momentum) and which market Capitalization (Large Cap, Small Cap) was best depending on the direction of interest rates and the presidential cycle timing system.

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