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Market Timing at Home and Abroad

By now, the story of the great rise of stock prices in the late 1990s and their great fall in the early 2000s seems clear. In the late 1990s, exuberant investors lifted P/E ratios to levels much higher—and pressed dividend yields to levels much lower—than their historical averages. True to form, stock prices fell in the early 2000s. By now, the lesson seems equally clear: Sell stocks when P/E ratios go above their historical average or when dividend yields go below their historical average. But is this lesson a good one? Statman argues that it is not. In a 2005 study, Fisher and Statman adopted the perspective of market timers, who search for P/E and dividend-based trading rules to guide them in switching from U.S. stocks to bills and back to stocks—such that they accumulate more than the sums accumulated by buy-and-hold stock investors. In this article, Statman follows with a study of market timing in three additional markets: U.K., Germany, and Japan. If P/E and dividend-based trading rules can be used to reliably time the market, such rules should work in similar fashion in all major developed markets. However, we find that they do not.