Monday, January 14, 2013

Economic Cycle and Dow Returns

Assuming that we don't run into a recession at the beginning of this year, 2013 will be the 5th year of economic expansion since recovery began in 2009.  How has the market done in the 5th year of other recoveries?

Below is the average return of the Dow Jones by year of past economic cycles.  Not surprisingly, the market tends to do the best in the first year of a recovery as securities prices and the economy slingshot back from depressed levels.  On average annual returns seem to follow a v shape pattern with the lowest rate of return coming in the 3rd year of recovery.  This is consistent with what we have seen so far in our most recent recovery.

The 5th year tends to be a good one, up 11.4%, and the 6th year tends to be decent, up 6.5%.  However only three of eleven post war expansions have made it through a 6th year.  By contrast, five have made it through a 5th year, although the breaking point tends to come in the third year--only six of eleven made it past that point.

Dow Return in Year of Economic Cycle
Recession dates based on NBER data rounded and adjusted by Avondale

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