Legendary investor Peter Lynch put it best: “Far more money has been lost by investors in preparing for corrections, or anticipating corrections, than has been lost in the corrections themselves.”
This concept was put to test in a recent study by DFA where it looked at the start date of all recessions from January 1947 to December 2022, as announced by the National Bureau of Economic Research. Then it calculated the returns of the S&P 500 Index for the ensuing 1 year, 3 & 5 years after the recessions were formally declared. Finally, it averaged those returns to show how investor portfolios, on average, fared during those times when the economy was in the tank.
Proving Lynch knew what he was talking about, on average:
• 1-year market returns after the start of a recession came in at +6.4%
• 3-year market returns after the start of a recession came in at +43.7%
• 5-year market returns after the start of a recession came in at +70.5%
Looking over the data, the researchers noticed that markets have, on average, tended to go through most of their bear market declines before recessions were announced, and began recovering soon afterwards. (i.e. think 2022) The markets tended to trend upwards during the recession, perhaps because investors anticipated that it would end soon and good times would restore corporate health.
The bottom line is pretty clear: even if you knew the exact date and time that a recession would be announced (and you don’t), the future market movements would still be uncertain and, on average, counterintuitive. Further galvanizing the long tenured SGH mantra of: Time in the Market outweighing Timing the Market.
Sam G Huszczo, CFA, CFP honored as Investopedia’s 100 Most Influential Financial Advisors of 2023 in the top link below: