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The Massive Myth About the Economy and the Stock MarketBy
Wednesday, May 14, 2014
You hear it every day. Too bad it's completely wrong...
Every day on the financial news, you hear "the economy is doing better, so stocks should do better" or words to that effect.
It sounds like sensible advice... What could be wrong with that?
If the economy is doing better, then companies should be making more money, right? And if companies are making more money, then their stock prices should go up, right?
It sounds like it makes sense. But that's not the way the world works...
The truth is, you want to buy when things look bad. That's when you make the most money.
That's not just my opinion. History shows that it's true.
The best time to own stocks, it turns out, is when the economy is shrinking. You may be surprised to hear it. But it's true.
We found this by simply comparing stock-market returns with economic growth. Specifically, we looked at the S&P 500 index for stocks and the U.S. gross domestic product (GDP) for the economy. U.S. GDP data starts in 1947, so that's where we began testing.
Here's what we found...
Let's say you bought stocks at the end of any quarter when times were bad (when the economy was shrinking), and then you held stocks for the next 12 months.
You may be surprised to learn that you would have done incredibly well – the return in those periods was more than twice the return of "buy and hold" investing over all periods.
The opposite is true as well... When the economy is doing extremely well, you actually make significantly less money than the "buy and hold" method.
You've seen this idea at work over the past few years...
The recent recession bottomed in mid-2009, right as U.S. stocks began their historic rise.
Back then, "experts" said stocks couldn't rise because of the bad economy. They were wrong, of course. And once the economy boomed again, the experts on TV told you it was time to buy. They are wrong once again.
Most investors think that you need the economy to be doing well to make money in stocks.
They have no idea that the opposite is true.
It's one of the most pervasive myths in investing. Don't fall for it. Instead...
Please remember that this is the truth: You make the biggest gains in stocks by buying during recessions – when the economy is doing poorly. And stocks make their smallest gains when the economy is absolutely booming.
It might sound counterintuitive... but it's absolutely true.
Don't forget it!
Good investing,
Steve
Further Reading:
Yesterday, Steve debunked another myth about the stock market... "It's simply not smart to bail out just because stocks have hit new highs," he writes. "History shows that, chances are, bigger gains lie ahead..." See the evidence here: The Myth About Buying at New Highs.
Steve says the Bernanke Asset Bubble is in its final innings, but the "sequel" is just getting started. "Europe has the same basic plot as the original Bernanke Asset Bubble in America," he writes. "The roles haven't changed... just the actors playing them." Find out how you can profit right here: What I Told My Paid Subscribers to Buy This Month.
Market NotesUNFORTUNATELY, THIS UPTREND IS ALIVE AND WELL Today's chart shows it's still boom times for "offense contractors."
Last year, we noted that the U.S. is involved in so many foreign wars that "defense contractors" should be called "offense contractors." We also noted that many folks were warning against investing in this industry... due to an expected reduction in government spending.
That spending reduction has not arrived. You can see this "non-arrival" by looking at the past two years' price action in the PowerShares Aerospace and Defense Fund (PPA). This investment fund is a "one click" way to own a diversified basket of offense contractors. These companies manufacture tanks, fighter jets, submarines, aircraft carriers, and various other things required to wage modern war.
In the DailyWealth office, we monitor a list of over 80 exchange-traded investment funds. The list covers every major stock sector, country, commodity, and currency. A quick check today shows the PPA fund is at the top of the list for one-year performance. It's up 38.5% in the past year. Like it or not, it's a bull market in offense contractors.
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