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Excerpt from the Hussman Funds' Weekly Market Comment (11/10/08):

All of us know that the stock market bottoms 6 months before the end of a recession.

The problem is that this “fact” isn't really true. The actual facts are that substantial losses typically occur between the market's peak and the point that a recession is universally recognized, and major gains reliably begin only about three months prior to the end of a recession, and continue into the recovery.

...

The chart below shows the performance of the S&P 500 two years before and after the end of each recession. Notice first that two years (104 weeks), one year (52 weeks) and even 6 months before these recessions ended, about half of the lines were below zero and about half were above zero, meaning that it has been a coin toss whether stocks would be higher or lower by the time that the recession was complete. In more than half of the post-war recessions, stocks were nearly the same place 6-8 months before the recession ended as they were two years before it ended. There is simply an enormous amount of variation. It isn't particularly useful to approach the market with nicely constructed scenarios about where or when the bottom will occur, especially when those scenarios (e.g. “6 months before the recession ends”) misinterpret the data.

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The distinction here is that an ongoing recession should not be evidence that keeps an investor completely out of the market (at least once that recession is well recognized). Instead, the data should remind us that even if the market experiences a great deal of volatility and sideways movement as a recession progresses, stock prices can be expected to launch into substantial gains before the recession is over.

This echoes Warren Buffett's remark a few weeks ago – “if you wait for the robins, the spring will be over.” Buffett isn't buying because he's confident that the recession has less than 6 months to go. He's buying because he finds stocks worth buying. Stocks can have very mixed performance over the course of a recession, but they almost always advance strongly before it ends.

...

Investors often have little success in actually buying low and selling high, because to buy low is to buy into fear and uncertainty, and to sell high is to sell into enthusiasm and confidence. Investors pay an enormous price for constant comfort. For our part, we'll continue to be aware of the risks, but also of the potential returns, and we'll take those risks that we expect to be well compensated – not in every instance, but on average.

Source: John Hussman: It's Tough to Buy Into Fear