The Dow Jones 10-Year Cycle

Annual seasonality is undoubtedly the most important cycle for you as an investor. But there are also cycles with different durations. In the 30 December 2020 issue of Seasonal Insights I e.g. discussed the 4-year cycle, also known as the election cycle.

However, there are even longer cycles.

Today I would like to present an analysis of the longest calendar-based cycle known to exist in the markets: The 10-year cycle.

The decennial cycle in the Dow Jones Industrial Average

The chart below depicts the pattern of the DJIA by decade from 1897 onward. This decennial cycle chart thus shows the average 10-year pattern of the index over more than 120 years.

On the left-hand side of the chart above the "0" one can see the average pattern of all years ending in the digit "0" (such as 2000, 2010 or 2020). Thereafter follows the seasonal pattern of years ending in "1" (such as 2001 or 2011) and so forth, until we arrive at the complete decennial pattern.

Dow Jones Industrial Average, 10-year cycle, over the past 124 years

Dow Jones Industrial Average, 10-year cycle,  over the past 124 years

A steep ascent is beginning in year 5!
Source: Seasonax

As can be seen, the stock market does appear to be following a 10-year cycle. In the first half of the decade – i.e., in the years ending in "0" up to the years ending in the digit "4" - stocks posted almost no gains on average; by contrast, they tended to rally significantly in the second half.

DJIA stocks delivered an exceptionally strong average performance in years ending in the digit “5”. The average gain amounted to 26.8%. This corresponds to more than one-third of the entire average 10-year return! However, in years ending in 7, strong slumps frequently occurred.

Rather problematic pattern until the middle of years ending in “2”

A seasonally weak phase typically occurred until the middle of years ending in “2” as well – such as e.g. 2002 or 2022. Does this indicate that the DJIA is at risk of suffering a period of seasonal weakness?

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