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

It is important to note that by the time the economy has reached the
end of the recession, the stock market has risen 22.4 percent on average.
Therefore, an investor waiting for tangible evidence that the business
cycle has hit bottom has already missed a very substantial rise in the
market.

GAINS THROUGH TIMING THE BUSINESS CYCLE

The excess returns of investors who can time their investment strategy
in relation to the peaks and troughs in economic activity are displayed in
Table 12-4. Since stocks fall prior to a recession, investors want to switch
out of stocks and into Treasury bills before the business downturn be-
gins—if they can identify the turning point—and return to stocks when
prospects for economic recovery look good. Switching returnsare de-
fined as the returns to an investor who switches from stocks to bills a
given number of months before (or after, if his or her predictions are not
accurate) a business cycle peak and switches back to stocks a given num-

214 PART 3 How the Economic Environment Impacts Stocks

TABLE 12–3

Expansion and Stock Returns, 1948 through December 2001

1948-1949 May 1949 Oct 1949 5 15.59%

1953-1954 Aug 1953 May 1954 9 29.13%

1957-1958 Dec 1957 April 1958 4 10.27%

1960-1961 Oct 1960 Feb 1961 4 21.25%

1970 Jun 1970 Nov 1970 5 21.86%

1973-1975 Sep 1974 Mar 1975 6 35.60%

1980 Mar 1980 Jul 1980 4 22.60%

1981-1982 Jul 1982 Nov 1982 4 33.13%

1990-1991 Oct 1990 Mar 1991 5 25.28%

2001 Sep 2001 Nov 2001 2 9.72%

Average 4.8 22.44%

Std. Dev. 1.81 8.81%

Trough

of Stock

Index

(1)

Trough

of Business

Cycle

(2)

Lead Time

between

Troughs

(3)

Rise in

Stock Index

from (1) to (2)

(4)

Recession