I compute economic gains for a power utility investor from taking business cycle dependent return predictability into account. Recent studies show that stock returns are only predictable in recessions, and bond returns are only predictable in expansions. I examine whether this finding can be...

This paper develops an extension of Cochrane's (2008) joint hypothesis framework by allowing the coefficients to depend on the state of the economy. For recessions the results are clear-cut. Dividend yields vary entirely due to return predictability. However, in expansions, the "dog that did not...