Waiting for a Signal to Get Back in the Market May Mean Missing Out

Last Updated Jul 27, 2009 12:27 PM EDT

If you jumped out of the market during the recent crisis and are still looking for the "all-clear" signal to get back in, I have some good news and bad news. The good news is that the signal may have sounded. The bad news is that it may be a little late for you.

On July 20, the Conference Board reported that the U.S. index of leading economic indicators rose 0.7 percent in June. This index has accurately indicated the end of every recession since its inception in 1959.

This was the third straight monthly increase, bringing the annual rate of increase over the last three months to 12.8 percent. Six of the seven recessions since 1960 ended either the month the indicator first showed a 12 percent annualized gain or a month or two beforehand.

Reading those headlines, you may think it's finally safe to jump back into the market. However, waiting for signals like that usually means you've missed much of the market's return. There are two reasons for that. The first is that much of the market's returns happen in very short bursts. The second is that the stock market itself is a leading indicator of the economy. And it tends to produce its best returns around the turning point in the economy when things are looking bleakest.

The following are market returns prior to the leading indicators beginning their turnaround in April and the returns through the end of last week, shortly after the release of the June leading indicator.

  • In the first two months of the year, the S&P 500 Index fell 18.2 percent. As of July 24, the S&P 500 had produced a year-to-date return of 10.0 percent. Since the end of March, the index returned 21.6 percent.
  • In the first two months of the year, the MSCI EAFE Index lost 19.0 percent. As of July 24, the MSCI EAFE had produced a year-to-date return of 15.1 percent. Thus, the return since the end of March was 46.4 percent.
  • In the first two months of the year, the MSCI Emerging Markets Index lost 11.7 percent. As of July 24, the index had produced a return of 47.9 percent. Thus, the return since the end of March was 54.6 percent.
Charles Ellis, author of Winning the Loser's Game, noted, "'Market timing' is unappealing to long-term investors. As in hunting deer or fishing for rainbow trout, investors have learned the importance of 'being there' and using patient persistence -- so they are there when opportunity knocks."
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    Larry Swedroe is director of research for The BAM Alliance. He has authored or co-authored 13 books, including his most recent, Think, Act, and Invest Like Warren Buffett. His opinions and comments expressed on this site are his own and may not accurately reflect those of the firm.