Predicting Stock Market Returns Based on Fixed Business Cycle

Does the concept of an idealized fixed business cycle help predict stock market returns? In his recent paper entitled “Forecasting 2011 Using U.S. Precedents: A Simple Analysis of Equity Market Performance”, Thomas Hall examines the performance of major U.S. stock market indexes at fixed intervals after business cycle troughs and extrapolates results to predict U.S. stock market returns for 2011. For extrapolation, he employs a regression relating returns during months 19-30 after business cycle troughs (equating to calendar year 2011 for the most recent trough) to returns during the immediately preceding months 1-18 after troughs. Using National Bureau of Economic Research business cycle trough months and monthly closes of the Dow Jones Industrial Average and the S&P 500 Index for trough months and months 19 and 30 after troughs as available since 1926 (14 and eight troughs before June 2009, respectively), he finds that: (more…)