Growth-Trend Timing with unemployment (GTT-UE)

The unemployment version of Growth-Trend Timing is a stock market timing rule from Jesse Livermore of the Philosophical Economics blog, published in February 2016. It holds the S&P 500 unless the US unemployment rate has risen above its 12-month average and the market is below its 10-month average at the same time. Then it holds Treasury bills.

The idea#

In his original Growth-Trend Timing post, the author used growth data to decide when a trend-following rule is worth obeying: only when a recession looks likely. A month later he searched for the best recession signal and settled on the unemployment rate compared with its own 12-month average.

Unemployment starts rising early in almost every US recession, and the monthly figure is almost never revised. A rule built on it therefore looks much the same in a backtest as it would have in real time.

How it works#

At the close of the last trading day of each month:

1. Compare the latest US unemployment rate (FRED series UNRATE) with the average of its last 12 monthly readings.
2. If it is at or below that average, hold 100% S&P 500 (SPY).
3. If it is above, hold SPY while it is above its 10-month average (a 210-day average here), and Treasury bills (BIL) while it is below.

The unemployment rate counts from the day it was released, and as first reported, so at a month end the strategy knows only the previous month's figure.

What the backtest shows#

The ETF-era test starts in mid-2007, when the Treasury bill fund begins. Since then it returned about 11.6% a year, against 10.7% for the S&P 500 and 8% for a 60/40 stock and bond mix, with a better risk-adjusted return than either. It gained 2% in 2008, when the S&P 500 lost 37%.

Its worst drawdown, 34%, was the COVID crash of February and March 2020, recovered by September. That crash came before unemployment could react, so the strategy stayed invested through it, and its drawdown was slightly deeper than the 60/40's.

Since publication in 2016 it has returned about 12% a year.

With simulated fund history the test starts in 1960 and returns about 11.6% a year, against 10.6% for the S&P 500, with a better risk-adjusted return. It gained 7% in 1974, when stocks lost 26%, and lost 5% in 2002 against 22%. It lagged in the strong first year of recoveries, such as 1975, 1991, and 2023.

When it struggles#

• Sudden crashes. Unemployment reacts only after a recession starts, so a crash as fast as 2020's is over before the signal turns.
• The first year of a recovery. Unemployment keeps rising after the market has turned, and the strategy waits for the price trend, so it misses part of the rebound.
• All-or-nothing. It is always 100% stocks or 100% bills.

Using it on Tactfolio#

The live strategy above runs these rules on SPY and BIL with FRED's unemployment rate, each value from its release date. Copy it to change the average or the trend length. Keller's Lethargic Asset Allocation uses the same signal to switch a quarter of a diversified portfolio.

Year by year

* Partial year.

The rules as implemented

This is the exact tree Tactfolio runs, rebalanced monthly with signals and trades at the close. Open it to inspect or copy it.

Sources and caveats

• Jesse Livermore (Philosophical Economics), In Search of the Perfect Recession Indicator (2016)
• Jesse Livermore (Philosophical Economics), Growth and Trend: A Simple, Powerful Technique for Timing the Stock Market (2016)

• The recession test is the unemployment rate (FRED UNRATE) above the average of its last 12 monthly readings, as in the source.
• The source compares the month-end close with its 10-month average; this version uses the daily 210-session average, the closest daily equivalent.
• Each economic figure counts only from the day it was first published, and as first reported: at a month end the latest figure is the previous month's, the one-month lag the source describes.
• SPY and BIL stand in for the source's S&P 500 total return index and 3-month Treasury bills.
• Signals and trades use the close of the last trading day of each month, as in the source.

Common questions#

What is the unemployment version of Growth-Trend Timing?#

It is a variant of the Philosophical Economics timing rule that uses the unemployment rate rising above its 12-month average as its recession signal, and leaves the S&P 500 only when the market is also below its 10-month average.

Why use the unemployment rate?#

The author found it the best single recession signal he tested. It rises early in almost every recession and is rarely revised, so a backtest on it is close to what investors could have done at the time.

How is this different from the original Growth-Trend Timing?#

The original watches real retail sales and industrial production growth. Both versions leave stocks only when the growth signal and the price trend agree.

Does it still work?#

Since publication in 2016 it has returned about 12% a year. The live record on Tactfolio shows how it is doing now.

Related strategies

• Growth-Trend Timing (Philosophical Economics’ GTT)
• Growth-Trend Timing with job growth
• Growth-Trend Timing with housing starts and income
• Lethargic Asset Allocation (Keller’s LAA)