Why Even Perfect Market Timing During Recessions Fails
Despite the strong recovery of stocks over the last few weeks, many investors are rightfully concerned that we may be heading into a recession. While there has been progress with trade negotiations, some tariffs are still in effect, and possibly more are on the way. This has led to continued uncertainty and concern about an economic slowdown. I’ve fielded numerous questions regarding when I think the end of the cycle may be. The truth is I don’t know. And even if I did know, there’s not much an investor can do with that information. If I gave you a crystal ball and you could know the exact day that a recession would begin and end, do you think you could beat the market?
The answer, surprisingly, is “no.” From 1934-2024, the average return of the S&P 500 was 11.5%. If you sold at the start of a recession and bought at the end, you earned 10.4%.
I was a bit shocked by this. I know all the data on timing the market, missing the best days, etc. But to be able only to invest when we're not in a recession? That seems like a homerun. So why is this not the case? Because the stock market is forward-looking. It often begins to fall before a recession starts and then begins to recover well before the recession ends.
One of the biggest reasons why this is the case is because of how quickly the market bounces off a bottom. Typically, the market doesn’t bottom out on good news. It bottoms out with less bad news. By that point, investors can’t be shocked by more bad news. Bad news keeps coming but investors buy anyway.
To illustrate this point, consider that the market is, on average, up 61% off the bottom by the time the recession is officially declared over.
Rather than trying to time the market because of fears of a recession, investors are better served by staying diversified and focusing on what they can control, such as rebalancing, tax loss harvesting, Roth conversions, among other strategies. The evidence shows that remaining invested through the ups and downs consistently outperforms attempts at tactical moves based on recession calls.
Happy Planning,
Alex
This blog post is not advice. Please read disclaimers.