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US equity market returns in even vs. odd years

Date: 24 Dec 2013

Equity market is cyclical; moreover, it’s a composition of several cycles – long, medium, and short. To identify these cycles and understand where we are in each of them is a complex research task.

At the same time there is simple idea on the ground that equity returns in even and odd years are different. Here I would provide evidence and explanation of two observations:
  1. S&P returns were higher in odd years vs. even (think about 2013!)
  2. Christmas rally were bigger in odd years


S&P data for 1951-2012 daily returns (with dividends and splits) was used to prove and illustrate these effects.

You can see visually on the chart below that S&P returns in odd years are usually higher than in preceding or subsequent even years.

On the next chart “Christmas rally” effect is analyzed. It’s more difficult to notice the difference as equity market performance during 11 days on average is not that big, so if you don’t see it below you will see the same in numbers.

1991 Christmas rally generated 7.8% one off return, I made a separate calculation without it.

S&P returns
TimeframeWhole yearDec 20-Dec 31 Dec 20-Dec 31, except 1991
Even years6.0%0.9%0.9%
Odd years11.0%1.3%1.0%

So during 1951-2012 period:
  • Odd years generated 5.0% higher equity returns than even years
  • “Christmas rally” in odd years generated 1.4% higher equity returns than in even years
This assumes that we would probably see some Christmas rally in 2013, though on average such rallies generate 1.3% return.


What could explain such a behavior? According to Trevor Greetham Fidelity International’s’ director of asset allocation it’s based on global inventory levels. “The inventory cycle typically lasts about two years. ‘Up’ years are good for company profits and equity prices with the inverse true when inventory levels are being drawn down. And over the last decade, Greetham notes, the ‘stocking up’ years have been odd-numbered calendar years while inventory draw-down years have been even-numbered ones.”

To check this I looked at average values for ISM Manufacturing Inventories Index during 1948-2013. The definition of this inventories index is:

“Inventories: reflects the increases and/or decreases in inventory levels”

Note: 2013 data is up to November

As the index changes the behavior since ~1990, the average for two periods was analyzed having in mind that 1990-2013 is more representative.

ISM Manufacturing Inventories Index average
Even years46.9
Odd years46.4

Even years45.9
Odd years44.6

Indeed there is a noticeable difference in even vs. odd years, and this proves the idea that these are inventories levels which define above difference in equity returns.

At the same time the connection is in the opposite direction: inventories grow slowly in odd years vs. even years. This could be interpreted as during years with high economic growth inventories sell out fast and levels are low while when economic growth slows down inventories grow.


These findings suggest the following strategy: buy and hold during odd years (buy Dec 31 even year – sell Dec 31 odd year) and stay out of the market in even. This way historical data assumes that you will get 11% return in the years you invest.

If you are long low frequency investor, the application of this strategy is not that simple as it might look like: where should you keep your money in even years?
  • Breakeven yield is 1%: if you get 1% for even years that your total return would be 11%+1%/2=6% annualized – equals to the one you would get with buy and hold.
  • The best guess is in treasuries with ~12 months maturity, but on today’s market you would get only 0.14% annual return.
  • While treasuries yields were not that low historically and reached 8% in some years, where to invest in even years (treasuries? AAA corporate bonds?) deserves a separate research.

Tags: Economic cycles, Market cycles

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11 Dec 2018 21:05