In my August 2022 article, The Truths About Investing In Stocks During Recessions, I discussed why jumping in and out of stocks based on whether a recession is coming or ending is a bad idea. It seems that many people are currently obsessed with whether the US is on the verge of – or already experiencing – a recession, based on the commentary that I have been seeing lately. In light of this, I want to bring up as well as expand on a point I made in my aforementioned article: That stocks tend to bottom before the economy does.
When I wrote about stocks reaching a trough before the economy, I used historical examples. One of them involved the S&P 500’s experience during the US’s most recent recession prior to COVID, which lasted from December 2007 to June 2009. Back then, the S&P 500 reached a low of 676 in March 2009 (on the 9th, to be exact), three months before the recession ended; the S&P 500 then rose 36% from its trough to 919 at the end of June 2009.
After the recession ended, the US economy continued to worsen in at least one important way over the next few months. The figure below shows the unemployment rate in the country from January 2008 to December 2010. In March 2009, the unemployment rate was 8.7%. By June, it rose to 9.5% and crested at 10% in October. But by the time the unemployment rate peaked at 10%, the S&P 500 was 52% higher than its low in March 2009 and it has not looked back since.
During an economic downturn, it’s natural to assume that it’s safer to invest when the coast is clear. But history says that’s wrong, and so do the wise. At the height of the 2007-09 Great Financial Crisis, which was the cause of the aforementioned recession, Warren Buffett wrote a now-famous op-ed for the New York Times titled simply, “Buy American. I Am.” In it, Buffett wrote (emphasis is mine):
“A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.
Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month or a year from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.”
If you wait for the robins, spring will be over. This is a really important lesson from Buffett that we should heed throughout our investing lives. Meanwhile, investing only when the coast is clear is a thought we should banish from our minds.
Note: An earlier version of this article was published at The Good Investors, a personal blog run by our friends.
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Disclosure: Ser Jing does not own shares in any of the companies mentioned.
