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Is the U.S. in a recession?
The official answer comes from a sort of Supreme Court of seven economists, who decide whether a "significant decline in economic activity spread across the economy, lasting more than a few months" has occurred. A more precise, but strictly unofficial, definition of a recession is two consecutive quarters of decline in gross domestic product, which is the total output (after inflation) of the nation's goods and services.
As I write, we haven't had that: The first quarter of 2008 registered growth of 0.6%. But that figure is subject to revision, and it's possible a recession started sometime in the waning months of last year.
The essentials
Still, if this is not a recession, it certainly seems like one. As an investor, here is what you need to know. First, a recession should be seen as an opportunity to make money. Second, recessions have tended lately to be infrequent, short and shallow. And third, recessions always end.
Analysts at T. Rowe Price looked at the last ten recessions and found that the median increase in stock prices (using the benchmark Standard & Poor's 500-stock index) six months after the market hit its low point was 24%. Twelve months after the low point, the median rise was 32%.
Of course, those gains assume you know where the low point is. Then you have the problem of knowing when the recession began. Frequently, the wise men don't tell you it has started until it's over.
Let's look at the current situation. The S&P hit a closing low on March 10 of 1273. At the end of May, the index was more than 100 points higher. If we assume that the S&P does not retreat below the March low and that a recession has indeed begun, then, based on the historical averages, the economic downturn began late in 2007 or early in 2008. Under such a rosy scenario, we should see the S&P climbing to about 1680 -- easily an all-time record -- and an equivalent rise to about 15,500 on the Dow by March 2009.
But if we view history another way, there's an unsettling possibility: The recession didn't get going until the spring, and, if so, the stock market still has a way to go down. On average, the S&P peaks about seven months before a recession starts. The peak in this cycle was early October; that would indicate a recession commencement date of April and a stock-market bottom around this coming November.
As I have said many times in this column, market timing is a game for fools. What we do know is that, historically, stocks start to recover before a recession ends, so when you are feeling particularly wretched about the economy and the headlines are filled with gloom and doom, you should start buying stocks. Or, to put it another way, the middle of a recession is one of the worst times to be selling stocks.
Says Tim Hayes, chief investment strategist for Ned Davis Research, "By the time the recession has gotten well under way, the market has mostly priced in the bad news." The time to be selling, if you are a genius market timer, is about a half-year before the recession starts. Good luck.
Receding recessions
But there is something else about recessions to consider: They seem to be getting shorter. The National Bureau of Economic Research has recorded 32 recessions since 1854, and their average duration was 17 months. But the ten recessions since 1945 have lasted, on average, just ten months.
More remarkable is that there were eight recessions between 1948 and 1982, or an average of one every four years, but between 1982 and 2007, there have been only two recessions, an average of one every 12 years. These last two recessions have been short (eight months each) and mild. In fact, in the past quarter-century, the U.S. economy has failed to grow (after inflation) only in 1991.
The most important thing to know about recessions, however, is that they eventually end. And after they do, stocks rise to higher levels than before the recession. The time it takes for stocks to recover to their prerecession peak varies wildly: In the past ten recessions, recovery has taken from two months to 67 months, with a median of ten months. But stocks do recover. Investors with a time horizon of at least five years -- and if your horizon is shorter, you shouldn't be in the stock market -- can be confident the market will come back.
POSTED BY: PotentialStillThere (July 22, 2008 11:37 AM)
One of the great things about the US is our ability to redefine ourselves. Our recessions provide opportunities to rid ourselves of obsolete methods, products, and mind sets. Capital becomes freed up and new engines of growth are found. Have confidence. While we are currently being pummelled, we still have greatness within our reach.
POSTED BY: Joe Williams (July 22, 2008 01:04 PM)
I am suspicious of this recession as being driven for political reasons. Every 4 years when there is a Republican in the White House all news would make you believe the US is about (to) crash. The hosing bubble is affecting us when too many citizens with no money down and below average credit bought a house and oil prices due to NO energy policy and Congressional obstructionism stopped drilling, stopped refineries, and stopped nuclear energy. We are paying the price for electing a Congress (that) only cares about itself!
POSTED BY: Ralf (July 22, 2008 01:19 PM)
...china's market is down almost 50%....Have you ever been to India? Neither one of these countries has the American Dream that we are familiar with... I agree that most everyone I know is feeling the pinch, but it also is (a) motivating factor to find alternate energy sources now that the price of oil has become more competitive with other more expensive sources.... The silver lining to me is that we may not add 25% of the world'd polution now that big energy companies are feeling the REAL pressure from the consumers...the dollar is still stong in South America. I suggest you start there.
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