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Tag: Economic cycles

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.

K-cycles or Kondratieff cycles – we are in economic Winter

Date: 29 Jun 2012 23:00

K-cycles is a theory which is remembered during long downsides, when hopes for return of economic growth fail for several years. Now is exactly the same time.

How do k-cycles work?

According to K-cycle theory, economy has long cycles of 50-60 years. Each phase of the cycle is favorable to a set of investments.


What is the length of the cycle?

Scott A. Albers and Andrew L. Albers on 30 March 2012 published a serious and innovative paper "On the Mathematic Prediction of Economic and Social Crises: Toward a Harmonic Interpretation of the Kondratiev Wave" analyzing US cycles ( Key conclusions:

Using a range of 7-year to 18-year “spreads,” we find that this approach provides strong evidence that American economic history is composed of four 14-year quarter-cycles within a 56 year circuit in the real GNP of the United States,1869-2007. These periods correlate closely with analysis by Nickolai Kondratiev and provide a framework for predicting an annual steady state rate of growth for the United States falling between 3.4969% and 3.4995% per year.

So, US cycles are 56 years long and (by the way) the long-term US GNP growth is 3.5%. It's a fact worth to remember.

Good research of global k-cycles could be find in "A Spectral Analysis of World GDP Dynamics: Kondratieff Waves, Kuznets Swings, Juglar and Kitchin Cycles in Global Economic Development, and the 2008–2009 Economic Crisis", Korotayev, Andrey V and Tsirel, Sergey V ( Key conclusions:

Our spectral analysis has detected the presence of Kondratieff waves (their period equals approximately 52–53 years) in the world GDP dynamics for the 1870–2007 period.

So, global k-cycle is 52-53 years.

Where are we in the current k-cycle?

This is the most interesting question. All the sources I saw tell that:
  • We are in the middle of Kondratiev's Winter
  • Spring will start approximately in 2020
Good pictures are very rare in the analysis of k-cycles, here are the best examples I saw:


Source: Masaaki Hirooka, Nonlinear dynamism of innovation and business cycles, 2003

One more opinion from Evan Gilbert, Head of MitonOptimal Asset Consulting, 26 January 2012: Where are we now? We believe that some emerging market economies (China, India, SA and Australia) lie in the Autumn phase – at about two o’clock. While prices of almost all assets rise in this environment, the future is not rosy – winter is coming as debt levels start to build in these apparently benign conditions. Developed markets have been suffering through winter in the last four years and it’s not quite over yet – we see them at around 5 o’clock. We expect them to move into the Spring phase in the next ten years. This is the basis for our increased allocation to equities, and decreased allocation to bonds. Our strategic positioning is fundamentally for Spring, but we are also very conscious of the onset of Winter in emerging markets – that’s what’s going to guide our tactical allocations.


Application of K-cycles theory

The theory never became widely used due to several problems:

1) Hard to find an indicator which follow at least 2-3 k-cycles (110-165 years)

2) Today any country's' economy experiences a combination of several k-waves.

K-cycle theory is good to explain long waves in one economy – like US or Europe. Before 1990s when the world was not so globalised as it's now it was possible to apply the theory to these economies. I believe it would work well in a totally globalized world. But now we are in the transition period from partly integrated world to a fully global world.

That means any economy experience a combination of k-waves: local one and several from outside, coming mostly from the biggest trading or investment partners. For example, China experiences a superposition or combination of a Chinese k-wave, US k-wave and probably European k-wave. One more complication to the analysis is that as China becomes more oriented on internal demand, Chinese k-wave becomes more important than US and European.

History: Nikolai Kondratiev

Nikolai Kondratiev died in 1938 in the Russian Gulag. Kondratiev was a Russian agriculture economist who, while working on a five-year plan for the development of Soviet agriculture, published his first book, The Major Economic Cycles, in 1925. Over the following years he carried out more research during visits to Britain, Germany, Canada and the United States.

In his book and in a series of other publications he outlined what later became known as “Kondratiev Waves”. These were observations of a series of supercycles, long surges, K-Waves or long economic cycles of alternating booms and depressions or of periods of strong growth offset by periods of slow growth in capitalist societies. These waves or cycles were at the time calculated to last from 50 to 60 years, or roughly a human lifetime in those days.

Kondratiev applied his theories to capitalist societies, most notably to the US from the time of the American Revolution. His undoing came in 1928 when he published his Study of Business Activity in the Soviet Union that came to much the same cycle conclusions for the Soviet economy that he had noted for capitalist societies. He fell out of favour with Josef Stalin, who saw his treatise as criticism. Kondratiev was arrested and following a series of trials he was banished to the Gulag, where he died.


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20 Apr 2024 22:57