Long-Horizon Mean Reversion in US Stock Returns

Summary

The document argues that US stock returns show cyclical mean reversion over horizons of roughly 30 years, with a half-life of about 15 years. In this account, periods of above-average returns tend to be followed by periods of below-average returns, providing a basis for multi-period return predictability. The paper also links this long-term market pattern to corresponding economic, social, and political rhythms in the United States.

The authors use the reported historical relationship among these cycles to form a medium- to long-term market outlook, assuming the relationship will persist unchanged. The supplied description does not specify the data, estimation procedure, forecast direction, or uncertainty around the outlook, so it is not enough to assess the strength or robustness of the evidence independently. The forecast depends on a long historical cycle continuing to hold and should not be read as a short-term timing method.

Key ideas

• The paper describes US stock-return mean reversion over a roughly 30-year cycle.
• The reported half-life of the return cycle is about 15 years.
• Above-average return periods are said to tend to precede below-average periods.
• The authors associate stock-market cycles with economic, social, and political cycles.
• The outlook assumes those historical relationships will continue unchanged.

Tags

# Low-Frequency Waves and the Medium to Long-Term US Stock Market Outlook


# Low-Frequency Waves and the Medium to Long-Term US Stock Market Outlook









In this paper we provide compelling evidence of cyclical mean reversion and multiperiod stock return predictability over horizons of about 30 years with a half-life of about 15 years. This implies that the US stock market follows a long-term rhythm where a period of above average returns tends to be followed by a period of below average returns. We demonstrate that this long-term stock market rhythm moves in lockstep with corresponding long-term economic, social, and political rhythms in the US. Assuming that the past relationship between these rhythms will hold unaltered in the future, we provide the medium to long-term stock market outlook.

Shown in full with attribution under the source's licence. Licence: abstract CC0

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.