The Fama/French Blog

Two prolific and very well respected Finance professors, Eugene F. Fama of the University of Chicago Booth School of Business and Kenneth R. French of the Tuck School of Business at Dartmouth College, have a blog worth noting: the Fama/French Forum. Their blog covers Finance and Economic Policy

Here is a recent Q&A on Recessions.

Question: The US economy is in a recession. Does it make sense to own stocks during a recession?

Answer: There is no evidence that market timing in response to economic events enhances expected returns. The market tends to lead economic activity. Stock prices tend to fall in advance of recessions and rise in advance of economic upturns. To time markets successfully, you have to come up with better forecasts of economic activity than those already built into stock prices. We don’t know anyone who can do this.

Moreover, investors who try to time the market by selling after news of a recession is already in prices are probably reducing their expected returns. Although realized returns are too volatile to make strong statements, there is some evidence that expected stock returns are relatively high during recessions and low during expansions. One can avoid the higher risk of stocks during recessions, but apparently only by passing up higher expected returns. —EFF/KRF