There is a marked difference in characteristics between even and odd years. To illustrate, plotting 30 years of monthly returns from Ken French’s small value portfolio against a 24 month index:
Poor performance in even years (months 1-12) starts earlier and lasts longer. The trendline exhibits a much narrower and later trough in odd years (months 13-24).
The market return, in excess of the risk-free rate, is plotted in blue. Excluding months 4-7 in even years, 8-10 in odd years and St. Louis Fed Recessions (brown) produces the red equity curve. Annual excess return is 10.2% with negligible drawdown (i.e. big losses typically occur in certain months).
Note that we are in currently in month 5 of an even year.
In the next post I will investigate the sensitivity of this simple approach to parameter changes.