It’s been a tough six months for the financial markets. Since broaching essentially the same all-time high price levels both last July and October, the stock market has been struggling, discounting the possibility that the U.S. economy is slipping into a recession. And we may be.
So what exactly is a recession anyway? The formal definition put forth by the National Bureau of Economic Research (the official arbiters of economic contractions and expansions, and many other interesting things, I’m sure) is two consecutive quarters of declining GDP growth. In plain English, a recession is a general business slowdown that lasts a while. Corporate earnings stall or fall, stocks drop and your monthly brokerage statement is no longer your friend.
But it’s not the end of the world. It’s really more like the winter that precedes spring. In spite of the immediate concerns that the market has just right now with the economy, it is important to remember that recessions are a normal part of the general business cycle. They are recurring phenomena. They happen.
Since 1950, the U.S. economy has experienced nine recessions. They have lasted (on average) approximately 10 months. During those periods, as you might imagine, stock prices fell — by an average of 26.6 percent.
So, our current market has recently been caught in the grip of a recessionary scare. And because of that, stock prices have been falling. But here’s something interesting — because the average post-war recessionary stock market decline has been 26.6 percent, a good portion of the normal recession-inflicted price damage may have actually already occurred.
Measuring from the recent market low set just a few weeks ago (1310.50 for the S&P 500 index) stocks have declined 16 percent from last October’s peak. If that level was not in fact the bottom of this particular downturn, my guess is that the final bottom might likely not be too far away from that level — perhaps 10 percent or so.
Having a historical perspective on recessions and stock market declines can be very useful. While the average post-war recession has lasted 10 months and the average stock market decline as a result of that recession has been 26 percent, the market’s downturn and demise doesn’t necessarily coincide with the economy’s turn for the worse. The market has an amazing ability to look ahead and discount economic conditions six to nine months down the road — long before those conditions actually occur. That means that by the time a recession is actually known to have begun, the market has likely already priced it in, found a bottom and has already begun to anticipate an eventual economic recovery. A new bull market begins.
That pattern may well be occurring right now. A credible argument can be made that stock prices peaked last summer, well before anyone was even thinking about the dreaded “R” word. And if a recession has begun, it will likely be dated as having started sometime this past fall, several months after the stock market first began to discount it last summer. And if this turns out to be an average recession in terms of duration, then the economy should begin to pull out of the doldrums by late next summer, or so. And since the stock market looks ahead, my guess would be that the market might well find a bottom possibly sometime between now and maybe mid-summer. Just a guess, but all based on financial and economic history.
Like the economy, markets too are cyclical. They go down as well as up. It’s a fact of investing life. But happily, the average gain made during bull markets dwarfs the average decline inflicted by bear markets. This particular winter of discontent might well be a good time for all of us to be sharpening our pencils and preparing a shopping list. As they say — you make your money in a bear market. You just don’t realize it at the time.