Stocks for the Long Run : the Definitive Guide to Financial Market Returns and Long-term Investment Strategies

12

CHAPTER

STOCKS AND THE BUSINESS CYCLE

The stock market has predicted nine out of the last five recessions!

PAULSAMUELSON, 1966^1

I’d love to be able to predict markets and anticipate recessions, but

since that’s impossible, I’m as satisfied to search out profitable com-

panies as Buffett is.

PETERLYNCH, 1989^2

A well-respected economist is about to address a large group of financial

analysts, investment advisors, and stockbrokers. There is obvious con-

cern in the audience. The stock market has been surging to new all-time

highs almost daily, driving down dividend yields to record lows and

sending price-to-earnings ratios skyward. Is this bullishness justified?

The audience wants to know if the economy is really going to do well

enough to support these high stock prices.

207

This chapter is an adaptation of my paper “Does It Pay Stock Investors to Forecast the Business

Cycle?” in Journal of Portfolio Management, vol. 18 (Fall 1991), pp. 27–34. The material benefited sig-

nificantly from discussions with Professor Paul Samuelson.

(^1) “Science and Stocks,” Newsweek, September 19, 1966, p. 92.
(^2) Peter Lynch, One Up on Wall Street, New York: Penguin Books, 1989, p. 14.
Copyright © 2008, 2002, 1998, 1994 by Jeremy J. Siegel. Click here for terms of use.