Forecasting 2011 Using U.S. Precedents: A Simple Analysis of Equity Market Performance

Abstract

In an effort to provide a set of reasonable expectations for stock market performance during 2011, we present results of two simple econometric exercises. Our starting point is the recent trough of economic activity which took place in June of 2009, according to the NBER. This means 2011 constitutes months 19 through 30 of the current economic recovery. Our first exercise considers how two major stock indices (the S&P 500 and the Dow Jones Industrial Average) have performed during similar periods in the past; i.e., from months 19 through 30 following economic troughs as depicted by the National Bureau of Economic Research. We use past performance to motivate a very simple univariate regression analysis, providing us with a point estimate for 2011 performance of the DJIA and the S&P500. Second, we examine the two most recent business cycles - with troughs in March of 1991 and of November, 2001 - to consider their limited information content regarding how various sectors (defined as two-digit SIC codes) performed in the past. We conclude the paper with suggestions for further research.

Keywords: Forecasting, Recovery, Business Cycle, Mean Reversion

JEL Classification: E17, E37, G14