Major financial firms and some 45% of economists now think the United States is in a recession. That list includes heavyweights such as Goldman Sachs, Merrill Lynch, and Morgan Stanley.
Several other financial institutions, while not yet using the "r" word, are nonetheless pessimistic. The Wall Street Journal quoted a Wachovia report that said, "There is no question that the economic news has taken an unusual and disturbing turn for the worse."
Of course, the stock market has done nothing to contradict this outlook. The S&P 500 is already down nearly 8% year to date.
If the worst is yet to come, you'd be daft not to sell ... right?
"An adverse feedback loop"
After all, every part of our economy seems to be spiraling downward together. Janet Yellen, president of the Federal Reserve Bank of San Francisco, called this "an adverse feedback loop -- that is, the slowing economy weakens financial markets, which induces greater caution by lenders, households, and firms, and which feeds back to even more weakness in economic activity and more caution."
Students of American history will remember that a similar feedback loop prolonged the Great Depression -- and it took a world war to break the cycle.
So if the stock market does tank this year, we'll all look back and say we saw it coming. Why not sell, and wait for safer times?
Not so fast
My Foolish colleague Paul Elliott calls this way of thinking "the real threat facing investors today." He advises you to stick it out -- as do I. Two key points apply:
- Recessions don't last long. Since 1945, none of the 11 recessions on record lasted more than 16 months -- and none longer than eight months since 1982.
- Stocks don't all go down during recessions. In reality, you can make a lot of money by investing when economic confidence is weak.
Take our last recession, March 2001 to November 2001, for example. In that time, the market had nearly the same number of gainers as decliners (2,000 or so on each side). While bellwethers such as Merck (NYSE: MRK ) , United Technologies (NYSE: UTX ) , and McDonald's (NYSE: MCD ) were down (15%, 23%, and 8%, respectively), Wal-Mart (NYSE: WMT ) , Johnson & Johnson (NYSE: JNJ ) , and IBM were up (14%, 18%, and 9%, respectively).
The killer stat, though, is this: Since the 2001 recession began, 801 stocks have tripled. Eight months of contraction simply cannot stop innovative operators with wide market opportunities, such as Apple (Nasdaq: AAPL ) and Amazon.com.
An aside to all this optimism
Fools should note that leading up to the recession, stocks dropped substantially in 2000 -- just as they've dropped recently. Those examples, however, just go to show how the stock market doesn't move in lockstep with economic realties. Instead, it's an imperfect prediction machine, with millions of analysts, institutions, and individuals trying to incorporate the information they have into daily trading decisions.
All that dynamism makes the market impossible to time, and if you're only starting to worry about recession now that we may or may not be entering one, you are way late to the game. To get ahead of the curve, you should start thinking about buying and holding for the long term.
Don't take our word for it, though. There's also brand-new research from IESE Business School professor Javier Estrada.
Estrada's recent paper, "Black Swans and Market Timing: How Not to Generate Alpha," is one of the most persuasive cases I've read for a disciplined buy-to-hold investment philosophy.
Estrada studied 15 major global stock markets for periods ranging from 31 to 79 years, with the full data encompassing more than 160,000 trading days. He found that "less than 0.1% of the days considered" actually matter to long-term returns, which means that "the odds against successful market timing are staggering."
So ... don't try to time the bottom
Now, this is a dangerous article to go on record with. If the market does tank this year, I'll get plenty of profanity-laced emails telling me that I'm "the real fool now." (Seriously, you'd think people would be over that joke by now.)
But even if we lose money this year (yes, I'm staying invested myself), we're all going to make a lot more money down the line, not through fruitless efforts to time the market, but by adding new money to great companies on a regular basis.
That way, rather than run from the lows, we'll double down on them ... and supercharge our returns in the process.
Buy the best companies instead
That's the tack Fool co-founders David and Tom Gardner are taking today in our Motley Fool Stock Advisor investment service. And we believe that today is offering some of the best buying opportunities since the 2001 recession -- which, remember, produced 801 triples in less than seven years.
If you'd like to take a look at the stocks we recommend today in Stock Advisor, click to join our service free for 30 days. There's no obligation to subscribe, but if a crash is coming, we'll help you take advantage of it.
This article was first published Feb. 15, 2008. It has been updated.
Tim Hanson does not own shares of any company mentioned. His hindsight is 20/20. Wal-Mart is a Motley Fool Inside Value recommendation. Johnson & Johnson is an Income Investor pick. Amazon.com and Apple are Stock Advisor picks. The Motley Fool has a disclosure policy.