Buy the company on its accounting fundamentals? On the basis of its stock chart? Or something in between?

These are really questions about whether or not investors should be concerned with trying to time the market. And, unless their investment horizons (and finances) are of heroic proportions, they probably should be, starting first at the macro-economic level.

The chart above shows annual US GDP growth (blue line, right scale) set against the annual S&P return. The GDP point for 2005 is an estimate from the Federal Reserve Bank of Philadelphia's quarterly survey forecast. Equity markets being forward looking, the S&P data is offset a year (1985 set against 1986 GDP and so on).

The correlation between the two sets is 53%. In other words, the movement in one explains more than half the movement in the other. On that basis it's a pretty small small step to conclude that the S&P500 is being wagged to a degree by GDP forecasts.

With UK data the same exercise shows a correlation of only 23%. In fact, FTSE100 data correlates more closely with US GDP data than with that of the UK. And over the same period the returns of the FTSE100 and the S&P500 show an 88% correlation. It appears, then, that for investors in both the US and the UK markets valuable guidance for portfolio direction is to be had from simply watching the US GDP actuals and forecasts.

This is intuitive and fairly obvious. But still some will wonder why bother - just play the solid company fundamentals. The same chart above shows that from 1986 to 2004 S&P500 returns ranged between -26% and +34%. With a 60 point range like that the non-heroic amongst us should conclude that the bother is profitable. No need even to hit the nail on the head with the timing.

Sources: S&P500 and FTSE100 data from; US GDP data from US Dept of Commerce, Bureau of Economic Analysis website; UK GDP data from the World Bank website.

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