Stock market and recessions

Some recessions have been anticipated by stock market declines. In Stocks for the Long Run, Siegel mentions that since 1948, ten recessions were preceded by a stock market decline, by a lead time of 0 to 13 months (average 5.7 months). It should be noted that ten stock market declines of greater than 10% in the DJIA were not followed by a recession[23].

The real-estate market also usually weakens before a recession[24]. However real-estate declines can last much longer than recessions.

Since the business cycle is very hard to predict, Siegel argues that it is not possible to take advantage of economic cycles for timing investments. Even the National Bureau of Economic Research (NBER) takes a few months to determine if a peak or trough has occurred in the US[25].

During an economic decline, high yield stocks such as financial services, pharmaceuticals, and tobacco tend to hold up better[26]. However when the economy starts to recover and the bottom of the market has passed (sometimes identified on charts as a MACD [27]), growth stocks tend to recover faster. There is significant disagreement about how health care and utilities tend to recover[28]. Diversifying one's portfolio into international stocks may provide some safety; however, economies that are closely correlated with that of the U.S.A. may also be affected by a recession in the U.S.A.[29].