Do markets rebound after really bad months?
Back in January I examined some of the worst months on record for 5 main asset classes in a piece titled, “Time to put money to work“. The summary:
What are the key take-aways?
– It does not pay to buy an asset class after a really bad month for the following 1 month.
– 12 Months later the return is not much different than average.
– 3 and 6 month returns, however, are stronger. You pick up on average about 3-4% abnormal returns buying after a terrible month. That annualizes to about 10% per annum.
A simple strategy would be:
After an asset class has a terrible month (ie MSCI EAFE in January), wait a month then take a 2 month position. i.e. buy March 1 with a two month hold.
How did that perform, buying March 1 with two month hold? Using the iShares EFA, I show a return of 5.9%, not too shabby! The other two poorly performing asset classes were foreign emerging (EEM), which would have done about 5%, and foreign REITs (RWX), which would have done about 4.9%.