Looking Back at Jeremy Siegel on the Business Cycle and the Markets

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Dr. Jeremy Siegel, professor of finance at The Wharton School of the University of Pennsylvania, has done a remarkable study of the returns of different types of assets over the past 200 years. He published his findings in the book Stocks for the Long Run in 1994. He has updated the book several times, most recently in 2014. It is surely one of the best books on investing of all time.

This article focuses on chapter 15 in Siegel’s book, “Stocks and the Business Cycle.” This chapter was a revelation to me when I first read it in 1994. It makes so much sense, and yet it’s rarely discussed in the financial literature. It’s as if Siegel discovered a gold mine and nobody else was interested. I’ll give you the short version of this landmark chapter.

Cliff notes for chapter 15 of Stocks for the Long Run

Invariably the stock market turns down before a recession hits and rises before it is over. Of the 47 U.S. recessions since 1802, 43 (9 out of 10) have been preceded by stock market declines of 8% or more. The table below is from the book.

Stock Prices and Business Cycle Peaks, 1948-2017

If an investor went to cash or Treasury bonds four months before each recession, the gains would be significant. The problem, of course, is knowing when to get back into stocks.

Here’s where the real money is made

I have a voracious appetite for anything related to the stock market, the economy and behavioral science. When I come across information like what is shown in these tables, I pay attention. Is it just coincidence, or is there something else going on? Do stock market investors “sense” when a recession is coming, precipitating a market decline? To answer this question, we also must talk about false signals.

Recession False Alarms by Stock Market, 1945-2017

The stock market telegraphs the onset of a recession, but it also gives false signals. What are we to make of this?