Abstract

In this study, we examine the differential predictive power of the dividend-price ratio [D/P] and the earnings-price ratio [E/P] for future stock returns during recessions versus during expansionary periods. We find that dividends do not decrease but prices decrease from the expansion periods to the recession periods resulting in the D/P increase during recessions. This increase in D/P during recessions is correlated with the increase in market returns following recessions. However, we find no significant difference in means of E/P between recession and expansion periods. Additionally, we find that the explanatory power of D/P and E/P for future market returns varies with time. D/P, E/P, and future market returns move together during the first two subperiods, peaking toward the end of recession periods. Particularly, D/P and future market return trend differently during expansion periods, but the trends are reset into tandem during recession periods, also explain why predictive regressions in studies using the full sample period present conflicting results.