A Market Timing Indicator

Exploring the Senior Loan Officer Survey

Introduction

Research indicates that tighter lending standards by banks are a negative predictor of future economic growth and stock returns. This article examines a lending standards indicator derived from the Federal Reserve's quarterly Senior Loan Officer Survey. I find that a simple market timing strategy based on this indicator has historically increased Sharpe ratios by up to 50% compared to a buy-and-hold approach, while significantly reducing drawdowns.