Investors may closely watch economic data to decipher what that means for their investment portfolios. While the data may prove useful in some respects, it does not offer much insight into the potential length, severity, or timing of a recession or rebound. Sound a lot like the mug's game of market timing? That's because it is.
If history is any indicator of what financial news we should and shouldn't worry about, unemployment numbers are a wave in an ocean for long-term investors. The following slides graph the S&P 500 Index’s total return over the past four recessions and in the current downturn. Although each recession was unique, they all share certain traits. For instance, each was not recognized until many months after it started. Meanwhile, the stock market began to rebound even though many indicators, including employment, were still in decline and did not show an uptick until well after the recessions were over.
It is the nature of economic data to look at the past, while stock markets look forward. This is why investors should not let current business sentiment in any cycle affect their long-term investment decisions - stick to your plan and relax.
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In both the mid 1970s and early 1980s, the recessions last 17 moths each, while in the early 1990s and 2000, the recessions lasted nine months each, but all were not announced until after they were over. Moreover, the NBER (National Bureau of Economic Research) did not announce each recession’s end until almost two years later. The take away: unemployment also peaked in the months prior to the official end. Consideration: this is not a pattern to necessarily look for, rather an observation from the data.
In the 1970s, 1980s, and 1990s recessions, the market began its recovery before the end, while the market languished for two years before rebounding after the 2001 downturn. This provides additional evidence that the stock market does not behave predictably through business cycles.
Now, to the most recent recession.
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The current economic downturn began in December 2007, although it was not officially announced until a year later, in December 2008. NBER has concluded that the recession officially ended in June 2009, drawing end to a 18-month blunder.
Of course, no one can offer a reliable forecast in the future. As the previous slides suggest, a recovery will only be identified many months after the fact and the market may recover long before unemployment peaks or the NBER announces an economic expansion.
With this in mind, investors should concentrate on maintaining discipline throughout business cycles rather than attempting to time them. Unemployment numbers in the Wall Street Journal are a number, and they represent just merely that, a number. There is no reliable way to identify when stocks are poised for recovery, and past business activity does not offer any insight. The stock market looks to the future and incorporates information into prices more quickly and efficiently than experts can collect business data and analyze it. Individual investors will fare better watching the latest clip of SportsCenter, rather than be influenced by financial "pornography" - that's the Arianna Capital solution.
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