Is There Ever A Bad Time To Buy Stocks?

By: Paul Kasriel | Fri, Feb 8, 2008
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Since the beginning of this year, I have been on the road telling people that what I warned them about last year at this time is coming to fruition – the U.S. economy has most likely entered a recession. Because it is such a pain to get online when traveling, I often have to rely on the financial news television networks for my market information. Typically, I mute the sound on these stations when I am watching. But what I have noticed over the years is that in those random moments when the sound is on, the preponderance of hosts and guests are telling the viewing audience that now, regardless of when "now" happens to be, is a great time to buy stocks.

Chart 1 shows the compound annualized rate of increase of the monthly average level of the S&P 500 stock market index over 10-year (120-month) periods. The data series starts in January 1921 and ends January 2008. In the post-WWII era, with only a few exceptions, the S&P 500 does post increases over 10-year periods. In the post-WWII era, recessions (shaded areas in the chart) do not seem to be a controlling factor with regard to 10-year increases or decreases in the S&P 500 index. That is, over numerous recessions, the S&P 500 index posts increases. Over 30-year spans, the S&P 500 index has always posted positive compound annual growth from January 1921 through January 2008 (see Chart 2). I am aware that the stocks that make up the S&P 500 index are not constant through time, so these gains overstate the actual gains. Nevertheless, if one's holding-period investment time horizon is 10 years, one can usually expect a positive return (not including dividend reinvestment) by purchasing the S&P 500 index. If one's holding-period investment time horizon is 30 years, one can always expect a positive return by purchasing the S&P 500, at least based on 88 years of history. So, with a sufficiently long holding-period investment time horizon, it could be said that it always is a good time to purchase the S&P 500 index in that you will usually achieve a gain.

Chart 1

Chart 2

Notice, however, that on a year-over-year basis, there often are declines in the S&P 500 index (see Chart 3). More often than not, these year-over-year declines in the S&P 500 index are associated with recessions. In fact, in only two recessions, 1926 and 1945, did the S&P 500 index not post a year-over-year decline. So, if one is a short-term investor, there clearly are better and worse times to buy the S&P 500 index. It is better to buy after the economy has entered a recession and it is better to sell before the economy has entered a recession. My beef is not with those who are telling you to buy now, given that, in all likelihood, the economy has entered a recession. But I would like to rewind the tape to see whether these same "buy now" experts also were urging you to sell last October.

Chart 3

If touts are always telling you now is a good time to buy common stocks, they must be referring to relatively long holding-period investment time horizons. If you are investor with a relatively long holding-period investment time horizon, you don't need the advice of these touts. Your time would be better spent watching Seinfeld reruns rather than watching the financial news networks. If you are a short-term investor, and touts are always telling you that now is a good time to buy stocks, the advice of these touts is incorrect. Your time would be better spent doing your own research on market timing or subscribing to a service that has a track record of accurate market timing (if you can recommend any to me, I would appreciate it) rather than watching the financial news networks. In sum, other than for receiving financial market data and/or for entertainment value, tuning in to the financial news networks is almost always a waste of your time.

Paul Kasriel is the recipient of the 2006 Lawrence R. Klein Award for Blue Chip Forecasting Accuracy



Paul Kasriel

Author: Paul Kasriel

Paul L. Kasriel
Director of Economic Research
The Northern Trust Company
Economic Research Department
Positive Economic Commentary
"The economics of what is, rather than what you might like it to be."
50 South LaSalle Street, Chicago, Illinois 60675

Paul Kasriel

Paul joined the economic research unit of The Northern Trust Company in 1986 as Vice President and Economist, being named Senior Vice President and Director of Economic Research in 2000. His economic and interest rate forecasts are used both internally and by clients. The accuracy of the Economic Research Department's forecasts has consistently been highly-ranked in the Blue Chip survey of about 50 forecasters over the years. To that point, Paul received the prestigious 2006 Lawrence R. Klein Award for having the most accurate economic forecast among the Blue Chip survey participants for the years 2002 through 2005. The accuracy of Paul's 2008 economic forecast was ranked in the top five of The Wall Street Journal survey panel of economists. In January 2009, The Wall Street Journal and Forbes cited Paul as one of the few who identified early on the formation of the housing bubble and foresaw the economic and financial market havoc that would ensue after the bubble inevitably burst. Through written commentaries containing his straightforward and often nonconsensus analysis of economic and financial market issues, Paul has developed a loyal following in the financial community. The Northern's economic website was listed as one of the top ten most interesting by The Wall Street Journal. Paul is the co-author of a book entitled Seven Indicators That Move Markets.

Paul began his career as a research economist at the Federal Reserve Bank of Chicago. He has taught courses in finance at the DePaul University Kellstadt Graduate School of Business and at the Northwestern University Kellogg Graduate School of Management. Paul serves on the Economic Advisory Committee of the American Bankers Association.

The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The information herein is based on sources which The Northern Trust Company believes to be reliable, but we cannot warrant its accuracy or completeness. Such information is subject to change and is not intended to influence your investment decisions.

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