One mathematician is looking to the Bible by using information gleaned about the Shmittah cycle to predict trends in international stock markets.
Thomas Pound is an American educator and mathematician with a passion for statistical analysis in the financial arena. Several years ago, he corresponded with a financial advisor who was using a decennial analysis to determine which years were optimum for investor returns. According to the theory behind decennial analysis, which was first proposed in the book “Irrational Exuberance” by Yale Economics Professor Robert Shiller, years ending in the number eight yielded better returns than other years. Years that ended in seven were even less lucrative than normal.
Armed with 144 years of market data going back to 1871, Pound set out to test the validity of this theory. As Pound explained to Breaking Israel News, “Being a statistician, if somebody makes a claim, then statistically, it should hold up.”
After performing an Analysis of Variance significance (ANOVA) test, Pound discovered that there was some basis for the financial advisor’s strategy of avoiding investing in years that ended in seven. It gave him a statistical advantage of 100 base points, with years not ending in seven averaging an annual return of 10.19 percent, compared to an overall average of 9.04 percent.
All would have been well and good, however the theory also advised investing heavily during years that end in the number eight. Pound sought out to learn why and the results were divinely enlightening.
Similar to the decennial theory, the Shmittah cycle takes place in a set of seven years. People who follow the market recognize the years 1973, 1980, 1987, 2000 and 2007 as years which the market saw a significant collapse.
The biggest ever single-day stock market crash occurred on September 29, 2008, when the Dow Jones Index crashed, losing $1.2 trillion in market value. This day also happened to be the day before Rosh Hashana, the Jewish New Year, signalling the end of the Shmittah cycle.
After a friend told him about a theory linking the seven year Sabbatical year to the stock market, Pound deepened his research. With little knowledge of the Shmittah cycle and expertise in statistical and stock market trends, Pound sought out to discover a statistical link between the market and Shmittah.
Applying the same ANOVA test to the Shmittah cycle, Pound’s research revealed that the sabbatical years were the only group of years in which the market cycle averages consistent significant losses since 1871. He also saw that Shmittah years were the most volatile years of the cycle. More surprisingly, the difference in loss was greater than that noted in Professor Shiller’s decennial cycle.
“Statistically, it appears that the calendar years in which the Sabbatical year ends are worse than the other six years, and that difference is significant based on the data I have,” Pound told Breaking Israel News.
With mathematical precision, Pound quoted King Solomon in Ecclesiastes 11:2, “Divide your portion to seven, or even to eight, for you do not know what misfortune may occur on the earth,” as practical advice to prepare for the inevitable Shmittah market crash. He notes that while the stock market is cyclical, this bit of Biblical wisdom advises we diversify our portfolios.
Pound pointed out that according to the decennial theory, 2015 should be one of the better years for investing in the stock market. However, according to the Shmittah theory, we are due for a market crash. As Pound succinctly put it, “In September, we can expect something really bad.”