Bad Reputation
Years ending in 7, such as the current year 2017, have a bad reputation among stock market participants. Large price declines tend to occur quite frequently in these years.
Sliding down the steep slope of the cursed year. [PT]
Just think of 1987, the year in which the largest one-day decline in the US stock market in history took place: the Dow Jones Industrial Average plunged by 22.61 percent in a single trading day. Or recall the year 2007, which marked the beginning of the GFC (“great financial crisis”).
Given that the current year is ending in 7 as well, is there a reason to be concerned, or is the year 7 crash pattern a myth?
The Pattern of the Dow Jones Industrial Average in the Course of a Decade
Below you can see a chart of the typical pattern of the DJIA in the course of a decade. This is not a standard chart. Instead it shows the average price pattern of the DJIA in the course of a decade since 1897.
The horizontal axis shows the years of the decade, the vertical axis the average performance of the index. Thus one can discern at a glance how the index typically performs in individual years depending on what their last digit happens to be.
DJIA, typical pattern in the course of a decade since 1897. Years ending in 7 did tend to be marked by large setbacks on average.
As you can see, in the first half of the decade, i.e. in the years ending in 0 to 4, the DJIA barely rose on average. By contrast, in years ending in 5 (highlighted in yellow above) the performance of the index tended to be particularly strong.
Alas, years ending in 7 (highlighted in red) typically saw a sharp retreat in prices in the second half of the year. Thus it appears as though the stock market is indeed generating a specific pattern in a 10-year cycle. Is this sheer coincidence, or does such a 10-year stock market cycle really exist?
In order to assess that, we will take a close look at the 19th century as well. Due to the length of the 10-year cycle pattern there are basically no other time periods one can sensibly review in this context.
The 10-year cycle in the 19th century
The next chart shows the pattern of the 10-year cycle during the 19th century.
Note: in this time period, average stock price increases were far less pronounced than thereafter. As a result the values on the vertical axis are noticeably smaller.
US stock prices, typical pattern in the course of a decade, 1801 to 1899. In the 19th century prices declined in the second half of years ending in 7 as well. A major reason for the comparatively smaller nominal capital gains stocks generated in the 19th century was of course the use of sound money, i.e., the gold standard. In the absence of incessant money printing, perceptions of risk were markedly different as …read more
Source:: Acting Man
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