Fed Model: The Last Four Months of the Year, by Tom Downing
In the table below, I have classified August to December returns for the past 27 years into 3 groups. A positive differential (Forward Earnings yield - 10 yr yield) has boded well for stocks. The current differential is about 2 percent, so the expected return is greater than 5 percent. Note that the unconditional mean is 3.89 percent for the last 4 months of the year, so the results are not as statistically impressive on that basis.
Also note that since 1979: when the differential has been greater than 0, the S&P has never dropped more than 4 percent (ignoring draw-downs) from August 31st to December 31st.
GROUP AVG STD N T %POS MAX MIN
DIFF < 0 0.07% 12.26% 9 0.02 67% 14% -25%
0 > DIFF > .01 5.38% 9.96% 9 1.62 78% 28% -4%
DIFF > .01 6.22% 7.08% 9 2.64 78% 18% -4%
ALL 3.89% 10.00% 27 2.02 74% 28% -25%