Stocks & Commodities V. 9:4 (140-141): Looking At 10-Year Stock Price Patterns by Lewis Carl Mokrasch, Ph.D.

Looking At 10-Year Stock Price Patterns

by Lewis Carl Mokrasch, Ph.D.

M any temporal cycles have some influence on the stock and commodity markets. One, the decennial
pattern, receives more attention near the beginning and end of decades. Studying stock market price
patterns anew presents some new conclusions.
From a report written by actuary W.S. Jevons in 1884, economist E.L. Smith obtained the critical clue he
had sought concerning the cyclical behavior of investment instruments. In the early 1930s, cycles of nine
and 11 years dominated the thinking of naturalists, because of such natural phenomena as solar radiation
cycles (which were shown to have 11-year cycles) and tree-ring cycles (which were shown to have nine
year cycles), among others. Even after much effort Smith was unsuccessful in finding any such nine- or
11 year patterns in stock market indices. But when he tested 10-year groupings, a strong pattern seemed
to stand out. He published the results of his work in 1939.
In 1954, stock technician Edson Gould updated and presented Smith's data in tabular form, making some
canny positive predictions about how the stock market would behave in 1955 (it had an excellent gain).
Smith next revised and republished his work in 1959. There have been at least four more editions of this
work since then.

METHODS
The data used for estimating yearly changes were the monthly average Standard & Poor's composite
indices for January and December. For the years after 1957, the S&P 500 index as reported in Barron's
was used. For 1957 and years prior, the data were taken from Smith's work, updated in 1970. (The
ANOVA program with p value estimation was that of Poole and Borchers [1979].)

RESULTS
Usually, the 10-year pattern of the stock market is presented graphically (Figure 1), representing the
cumulative gain in a broad-based stock market index over a typical decade of data from 1889 to the

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Stocks & Commodities V. 9:4 (140-141): Looking At 10-Year Stock Price Patterns by Lewis Carl Mokrasch, Ph.D.

present. An uninformed glance at this figure could persuade an investor to invest in stocks during the up
years and also to plunge vigorously into stocks for the action of the fifth and eighth years of the decade in
question. During the seventh year of the decade and the year of the decade ending in zero (to keep things
simple, hereafter referred to as "fifth year," "eighth year," "seventh year" and "zeroth year"), he might
choose to be in cash.
This seems to be an easy and pat scenario — but is it real? On close statistical examination, the answer is
mostly no. But it is surprising to find out that two years of the decade are significantly different from the
rest, and better in terms of stock market action.
In Figure 2, the mean percentage change in the S & P index for each year of the decade is presented,
along with the standard deviation for each. The standard deviations are vital for interpretation .
Using the commonly accepted scientific standard for significance, p<0.05 (19 to 1 odds against a purely
chance occurrence), only the fifth and eighth years differ significantly from the decennial mean (5.4% ±
18.7, n =101). The rest of the years are not even close to being significantly better or worse than the
overall mean.
Going back farther, including the data used by Smith for 1831 -89, the pattern is still evident, but the p
values increase to 0.037 (still significant) for the fifth year and 0.097 (not significant) for the eighth year.
Using the 160-year set of data, the mean annual gain in the stock market index is 4.6%±19.0.

DISCUSSION
If the information from Figure 1 were used without further analysis, a buy-and-hold strategy begun early
in a first year would yield a gain of about 54% by the end of the zeroth year. Over the last century,
government bonds have yielded 4.9% on average, while S & P triple-A bonds have yielded 6.3%. A
stratagem of shifting into stocks when they are expected to appreciate more than 4.9% and government
bonds otherwise could be expected to yield a total appreciation of 86% by the end of the decade using the
simplistic scenario.
Such a stratagem would probably be disappointing because there are no years of significantly superior
performance in the stock index except for the fifth and eighth years. Note that the average annual
appreciation during the decade is strongly enhanced by the performance of the fifth and eighth years. If
we delete the results of all the fifth and eighth years, the average annual stock index appreciation for the
remaining years decreases to 2.3% ± 18.1!

CONCLUSION
Considering the performance of stock market indices back to 1831, the fifth year of the decades has had a
significantly greater index increase than any other. Using the data for the last century, the eighth year of
decades has also had a superior index increase. The decade years other than the fifth and the eighth show
an average appreciation in stock prices of 2.3% per annum, and none is significantly better or worse than
any of the rest. For these years, investors who are not skilled stockpickers could well be advised to be in
bonds for most of the time. For investors who are willing to let mutual fund managers do the stock
selection, the outlook is even more dismal; since 1970, common stock funds have performed 0.83% less
well on average than the S & P 500 index, according to The Wall Street Journal .
Lewis Carl Mokrasch is a professor of biochemistry at Louisiana State University Medical Center. Ale

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Stocks & Commodities V. 9:4 (140-141): Looking At 10-Year Stock Price Patterns by Lewis Carl Mokrasch, Ph.D.

has been active in the market for 35 years and has offered an advisory service for the last 20.

REFERENCES
Ayres, Leonard [1939]. Turning Points in Business Cycles, Macmillan.
Clements, Jonathan [1990]. "Cash didn't bolster stock funds this year," The Wall Street Journal,
December 28.
Gould, Edson [1954]. Omensfor 1955, A. Weisberger and Co. Jevons, William Stanley [1884].
Investigations in Currency and Finance, Macmillan, London.
Poole, Leonard, and Marc Borchers [1979]. Some Common BASIC Programs, Osborne/McGrawHill,
Berkeley.
Smith, Edgar Lawrence [1939]. Tides in the Affairs of Men, Macmillan.
___ [1970]. Common Stocks and Business Cycles, fourth edition, William Frederick Press.

FIGURE 1:Cumulative annual changes (arithmetic sums of the means) in the Standard & Poor's
composite index for each year of a decade. Calculations are based on the monthly average of the index
from January 1890 to December 1990.

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Stocks & Commodities V. 9:4 (140-141): Looking At 10-Year Stock Price Patterns by Lewis Carl Mokrasch, Ph.D.

FIGURE 2:Averages with standard deviations of the data presented in Figure 1. Midpoint line in each
rectangle is the overall average. Top and bottom sides of the rectangles are the means plus or minus
one standard deviation. The extreme left rectangle represents the total data for the period given. Black
dots represent the individual datum points. The dashed line represents the overall mean;p values
comparing the mean of each decade to the overall mean are given above each box; p<0.05 is the
criterion for significance.

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