Issue: 137
Sent: 11-11-2008 11:38:01
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US Markets and Economic Recession
Equity markets anticipate changing conditions and could improve well before a recession ends in the USA.
Between 1950 and 2007, there were nine officially designated recessions in the USA, according to the prestigious Washington-based economic think tank, the National Bureau of Economic Research (NBER).
Although commentators informally characterize a recession as a two-quarter contraction in real gross domestic product, for the NBER a recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough.
The chart at http://www.thebigpicture.com.au/atc/nber_market.htm shows movements in the U.S. S&P 500 stock price index since 1950. The chart also highlights the information in the table above which summarises the timing and duration of each of the nine NBER designated recessions.
Each recession has coincided with a fall (and subsequent recovery) in stock market prices. In each case, the market fall has commenced before the beginning of the recession. The average market fall associated with these recessions has been 20.5%. So far, in the current cycle, the S&P 500 has fallen by 39.9% since it reached its peak value in October 2007. There was a comparable fall associated with the recession of 1973/74 when the market fell by 45.5%.
The average duration of US recessions over the past 55 years has been 11.3 months. In each case, the stock market bottom occurred part of the way through the period of the recession. The average time period between the beginning of the recession and the bottom of the stock market was 6.7 months. On average, the stock market reached its low point 57% of the way through a period of recession leaving it in recovery mode for just over 40% of the duration of the recession.
Aside from the historical interest, that still leaves us having to make a judgment about how we are positioned in the current cycle before we can draw any inferences about the timing of possible market recoveries.
Although an official declaration of recession has not been made this year, the chart highlights the latest period beginning in June 2008 as another period of economic contraction.
Commentators are suggesting that the U.S. economy could continue to contract until the middle of 2009. That would not be an especially lengthy recession. Given surrounding circumstances, the current recession seems likely to be longer than average. If it simply equalled the 1973/74 and 1981/82 recessions, the two longest since 1950, the current recession would last until the end of 2009.
A recession lasting until the end of 2009 suggests the U.S. stock market could reach its bottom and begin recovering in March (or thereabouts) 2009 based on the historical connections between recession and market performance outlined above.
That might be a best case scenario. According to the NBER, the Great Depression, to which our current circumstances are frequently being compared, lasted 43 months. If the current recession is genuinely more severe than anything the world has seen since the Great Depression, it would last longer than 17 months pushing its end into the first half of 2010, at least, and a market recovery correspondingly further into the future.
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