Which Improves First - The Stock Market or the Economy?

The article below is written by David I. Templeton, An SA Editor, today :

Historical data suggests the equity markets improve before the economy begins to show some economic strength. As a result, can investors afford to sit on the sidelines before they see signs of an expanding economy?

In his book, Stocks for the Long Run, Jeremy Siegel, a professor at The Wharton School, notes that:


...of the 42 recessions from 1802 to the present (2002), 39 of them, or 93 percent, have been preceded (or accompanied) by declines of 8 percent or more in the total stock returns index. Historically, a bottom in the market has led a trough in the business cycle by about five months.

Investors will have little luck predicting market upturns and downturns because turning points are usually identified months [after] they’ve occurred, not beforehand. In the meantime, they’ll miss out on significant gains. From the bottom of the market to the end of the recession, the stock market has risen an average of about 24 percent (emphasis added).

Click to EnlargeSource: BetterInvesting Magazine

Certainly there have been false signals; however, if an investor's risk tolerance and asset allocation profile calls for equity exposure, staying in the market is almost a prerequisite to achieving market beating returns. As I noted in an earlier article, Focus On The Long Run, timing the market is very difficult. If an investor is out of the market on those days when the market gaps higher, long run returns will be impacted negatively.

Source:

* Don't Wait for the Clouds to Break ($) BetterInvesting Magazine, BetterInvesting Editors, September 2008

Related Posts :

Please Note!
This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer on the bottom for more information.

You are welcome to republish this article, or any portion thereof.
Please, cite the actual/original source. I would be grateful if you could link back.