Stock Market Improves Before Economy

David Templeton, at Disciplined Approach to Investing, presents evidence showing that when the market is in the bottoming process, it’s important to stay invested so we don’t miss those days where the market gaps higher on the way to recovery.

– Ilene

…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. [emphasis added]

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 on chart for larger image)

Source: 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.