Does it Pay to Forecast the Business Cycle? A U.S. Update and an International Perspective

Abstract

Over the period 1970-2015, investment returns were enhanced by merely knowing concurrently whether the economy was in a state of expansion or contraction, and making the most basic asset allocation decision of whether to be in stocks or bonds. In the United States, an annual excess return of 2.01% was earned by investing in stocks during expansions and in bonds during contractions. In eight foreign markets, the average annual excess return from the same strategy was 1.74%. Forecasting business cycle troughs is more important than business cycle peaks. The authors conclude simple passive timing improves fund performance using business cycle peaks/troughs, and even slight forecasting prowess is rewarded with positive performance. Importantly, even investors who invested one month after the cycle turns could still earn excess returns.