Stock market performance during economic cycles

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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.

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