Economic expansions and equity returns

Christian J. Galipeau

Christian J. Galipeau
Senior Investment Director, 12/03/20


What can history tell us about the length of economic expansions and recessions? And further, what can investors expect from the stock market during economic expansions?

We researched the history of economic cycles and equity market returns going back to 1926 to build a framework for investors. In our research, U.S. stocks were represented by the Ibbotson U.S. Large Company Stock index until the inception of the S&P 500 Index. The National Bureau of Economic Research Recession Indicators series was used to date the economic cycles. Exhibit 1 plots the cumulative growth of US stocks since 1926, with the official recessions overlaid in the shaded bars.

Exhibit 1: U.S. economic cycles & cumulative equity returns since 1926
U.S. economic cycles & cumulative equity returns since 1926

Next, we looked specifically at the individual cycles to assess historical performance (Table 1). Since 1926, and including the current cycle, there have been 16 distinct economic recessions. We calculated the average time (in months) the U.S. economy spends in expansion and in contraction, along with cumulative equity returns and annualized equity returns for each period.

Table 1: U.S. economic cycles and equity returns
U.S. economic cycles and equity returns

On average, the U.S. economy has spent around 58 months in expansion and 13 months in recession. The average return for equities in the expansion periods is 106.6% on a cumulative basis or 15.3% on an annualized basis. Summary statistics are found in Table 2:

Table 2: Summary Statistics - U.S. economic cycles and equity returns
Summary Statistics - U.S. economic cycles and equity returns

The minimum expansionary period is 10 months and the maximum expansionary period is 128 months. The average expansion measures 58 months.

Similarly, the minimum equity return (annualized) is 1.4% in expansions periods. The maximum equity return (annualized) is 47% in the expansion periods. The average equity return (annualized) in expansion periods is 15.3%.

Conclusion

There have been 16 expansion periods since 1926. The average economic expansion has lasted for 4.85 years and produced an average, annualized return of 15.3%.