Welcome to The Visionary Investor, where we uncover the secrets to successful investing. In this article, we will go on a journey into the fascinating world of market timing. While perfect timing may be elusive, we’ll explore how understanding longer-term trends and patterns can enhance your decision-making process and potentially lead to more informed investment choices and “better timing”.

It may be difficult to perfectly “time” the stock market but “timing the market better” certainly does exist.

The Power of Historical Patterns: To gain insights into market timing, we turn our gaze back to the 1960s, where we observe eight recessions that followed distinct patterns. By studying these historical recessions, we unveil a noteworthy indicator—the 10-year Treasury minus the 3-month T-bill spread.

Unveiling the Indicator: Our analysis brings us to November 2022, a significant turning point. It was during this time that the 10-year Treasury minus the 3-month T-bill spread entered negative territory, catching the attention of investors. Drawing on historical evidence, we discover that once this spread becomes negative, there is typically an average of 11 months until a recession occurs¹.

Understanding the Trend: Armed with this knowledge, investors gain an additional tool for assessing market direction and potential risks. However, it is crucial to recognize that while this indicator has demonstrated strong historical consistency, it is not infallible. The economy is a complex ecosystem influenced by numerous factors, and it can deviate from historical patterns.

Market Timing as an Art: Market timing requires a delicate blend of knowledge, research, and intuition. Rather than attempting to predict precise market movements, I believe it is wiser to use indicators and trends as guideposts for informed decision-making. The key lies in understanding the market’s tendencies and using them as pieces of a broader puzzle. Here is a look into the price movements around two of the past recessions:

Embrace the Power of Historical Context: As an investor, it is essential to embrace the power of historical context as learning tools. Keep a keen eye on indicators like the 10-year Treasury minus the 3-month T-bill spread, using them to inform your investment strategies. In the charts above, we notice once this indicator became negative (negative spread line) this was a warning that a recession was coming. While this is just a part of the equation, combining this with other indicators can help you see a more complete picture of what is going on in the stock market.

We can observe that the S&P 500 (also referred to as the stock market) fell drastically during each of these two recessions (the red bar). Not knowing whether we are in a recession or not, which can be confusing especially when you hear others claiming we are in a recession when we are not, truly makes it harder for you to make the best decisions.

Timing the market better: Imagine you didn’t know about this negative spread indicator and had no idea we were about to head into a recession. You purchased an S&P 500 index fund right before the recession in 2007. Within a few months your investment has lost a lot of money. At this point, if you still don’t know we are in a recession…

…you may decide to sell. Locking in losses. So you bought high and sold low in this case due to not understanding the patterns and being fearful.

However, had you realized we were in the middle of a recession, decided to purchase more of your investment and kept holding on to it, you could have made a lot of money. Of course, this is easier said than done. However, as you learn more about these patterns in the stock market, you will start building that confidence and learn how to recognize better times to buy, sell or hold.

Timing the market perfectly may be an elusive goal, but by understanding longer-term trends and patterns, investors can improve their decision-making process. Our exploration into historical recessions and the 10-year Treasury minus the 3-month T-bill spread serves as a reminder that market timing is an art that requires a unique approach. Timing the market, perfectly, well that’s another story. However, timing the market better certainly is possible!

Disclaimer: I am not a financial adviser. This is for educational purposes only. Full disclaimer here.

¹This data was pulled from FRED and analyzed over the past 8 recessions from 1960 to 2022 – the average time between the month when this spread first became negative and the recession started was 11 months.