@article {Pel{\'a}ezjpm.2021.1.206, author = {Rolando F. Pel{\'a}ez}, title = {Tactical Asset Allocation with the Relative Total Return CAPE}, elocation-id = {jpm.2021.1.206}, year = {2021}, doi = {10.3905/jpm.2021.1.206}, publisher = {Institutional Investor Journals Umbrella}, abstract = {The extant literature documents an inverse long-term relationship between the cyclically adjusted price/earnings ratio (CAPE) and 10-year S\&P 500 forward returns. This article shows that a different price/earnings ratio{\textemdash}the relative total return CAPE (RTRC){\textemdash}has short-term signaling value. During 1901Q1{\textendash}2019Q4, tactically shifting from the S\&P 500 to 10-year Treasury notes yields a 79\% increase in terminal wealth relative to buy-and-hold. Several RTRC filters yield positive and statistically significant alphas and superior Sharpe and Treynor measures. From a time-series perspective, the RTRC is indistinguishable from a level stationary series, whereas the CAPE appears to have a unit root.TOPICS: Security analysis and valuation, fundamental equity analysis, portfolio construction, performance measurementKey Findings▪ The article demonstrates the feasibility of tactically switching from the S\&P 500 index to 10-year Treasury notes using the RTRC.▪ The historical simulation yields a 79\% increase in terminal wealth relative to buy-and-hold during 1901Q1{\textendash}2019Q4.▪ Several filters yield positive and statistically significant alphas and superior Sharpe and Treynor measures.}, issn = {0095-4918}, URL = {https://jpm.pm-research.com/content/early/2021/01/27/jpm.2021.1.206.1}, eprint = {https://jpm.pm-research.com/content/early/2021/01/27/jpm.2021.1.206.1.full.pdf}, journal = {The Journal of Portfolio Management} }