That's not the first time that the crowd's lethargic habits have been scrutinized. The Michigan Retirement Research Center at the University of Michigan evaluated nearly 1 million 401(k) investors over a recent eight-year stretch and found that results generally trail a naïve equal-weighted asset allocation strategy ("The Efficiency of Pension Menus and Individual Portfolio Choice in 401(k) Pensions," by Ning Tang, et al). Meanwhile, a 2004 study reveals that nearly half of 16,000 investors with TIAA-CREF retirement accounts made no active changes to their asset allocation for the decade through 1999 ("How do Household Portfolio Shares Vary With Age?" by John Ameriks and Stephen Zeldes).
The widespread habit of inaction reminds us why rebalancing in a timely manner can be so productive for earning above-average returns. "Slow moving capital," as one research paper remarks, is a key factor for explaining the dramatic changes in realized Sharpe ratios (volatility-adjusted risk premiums) in the stock market over time ("Is the Volatility of the Market Price of Risk Due to Intermittent Portfolio Re-balancing?" by YiLi Chien, et al).
What's behind the market's volatility? The details are debatable, but it's clear that the main catalyst is the business cycle. Then again, could it be that the market influences the ebb and flow in the economy? Maybe it's a bit of both.
Empirical Facts
You can't "prove" anything in economics, but there's no shortage of smoking guns to consider for assessing the odds of the next recession. The future is unpredictable, but that's hardly the basis for practical advice unless your time horizon really is measured in decades-and you have the steely discipline to ignore short-term volatility. Otherwise, developing some macro perspective for managing risk is worthwhile. That includes keeping an eye on a number of empirical "facts" uncovered over the years:
The stock market has peaked ahead of seven of the last nine recessions. During the other two downturns, equities topped out in the early stages of the economic contraction via sharp market declines.
Stock market volatility jumped sharply higher just before the onset of eight of the last nine recessions.
The Treasury market yield curve inverted (short rates above long rates) in advance of every recession over the last 40 years.
Stock market volatility has dropped to relatively low levels before recessions, but it spikes upward during the early stages of economic downturns.
The price of crude oil has substantially increased before or during the early stages of every recession since the early 1970s, which marks the start of free-market energy pricing.
Credit spreads are countercyclical: Yield premiums in corporate bonds over Treasurys have widened in advance of approaching recessions in recent decades.