Stock market performance during economic cycles
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July 1st, 2009 by Prieur du Plessis, Investment Postcards from Cape Town
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An interesting analysis on the performance of the S&P 500 Index during various phases of the economic cycle was highlighted in a recent report by Citigroup Investment Research & Analysis, courtesy of US Global Investors.
The table below shows the performance of the Index in 15 complete economic cycles since 1921 and part of the current economic cycle. The performance has been broken down into five phases of each economic cycle: early expansion, middle expansion, late expansion, early contraction, and late contraction.
Interestingly, the average and median figures show that most of the stock market performance occurs in the early and middle expansion phases, and in the late contraction phase.
In order for this study to be of use one obviously needs to know where in the economic cycle we are. In this regard, Merrill Lynch (again via US Global Investors) has just published The Global Wave indicator, which quantifies trends in global economic activity. This measure signaled a downturn in September 2007 and troughed in June, suggesting that the global economy could be on the road to recovery. Following troughs in The Global Wave, global emerging markets tend to be the best-performing category with a median return of 39.6% over the subsequent 12 months, whereas the US usually lags with a more pedestrian 10.0%.
Based on past economic cycles, the above studies indicate a favourable environment for stocks over the next six to 18 months, short-term corrections aside.
Source: US Global Investors - Weekly Investor Alert, June 19, 2009.
Dr. Prieur du Plessis is an investment professional with 26 years' experience in investment research and portfolio management. More than 1,200 of his articles on investment-related topics have been published in various regular newspaper, journal and Internet columns, including his blog, Investment Postcards from Cape Town. He has also published a book, Financial Basics: Investment. Prieur is Chairman and principal shareholder of South African-based Plexus Asset Management, which he founded in 1995. The group conducts investment management, investment consulting, private equity and real estate activities in South Africa and a number of foreign countries. He also serves as Honorary Consul of Slovenia for South Africa, actively developing economic, cultural and scientific relations between Slovenia and South Africa. Prieur is 54 years old and live with his wife, television producer and presenter Isabel Verwey, and two children in Cape Town, South Africa. His leisure activities include long-distance running, traveling, reading, motor-cycling and scripophily. Read more from the author/contributor here.
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