3 Takeaways From Past Investment Cycles
We’ve all been told before that “history doesn’t repeat itself, but it rhymes,” and “those who cannot remember the past are doomed to repeat it”.
In the investment world, there’s a lot of truth in those quotes. The economy, the business cycle, and the markets all have observable patterns: expansions & recessions, growth and decline, bulls and bears.
For example, much has been said about the so-called Shiller P/E ratio, which values today’s price relative to a 10-year earnings average. In taking a 10-year average, we capture at least one complete business cycle. Examining the S&P 500 from a 10-year cycle perspective, we find that the 5th year is historically the strongest year in the cycle dating back to 1881. So, long-term patterns are supportive heading into 2015.
The 4-year (or presidential) cycle looks at the stock market within the 4-year election perspective. The current mid-term year is historically so-so, but the pre-election year (i.e. 2015) is historically the strongest based on data going back to 1872.
Even a short-term perspective bodes well for stocks. The phrase “sell in May and go away” is based on looking at rolling 6-month returns in the stock market. Based on the evidence since 1926, we’ve just entered the strongest 6-month period of the year.
Of course, what will actually happen isn’t dictated by what has historically happened. The investments markets have changed over the years, which lead some to question the usefulness of a historical approach.
But one thing remains the same within the markets: humans. As long as prices reflect opinions of opportunity or risk, historical patterns are important in understanding what’s happening in the markets.
And based on what history suggests, investors have several reasons to be optimistic. Let the most reluctant bull market in memory carry on!