How Long Will the Recession Last and How Will the Market Perform?

Now that US economy is officially in recession, the big question on everyone’s mind is, how long will it last?

So far, the current recession is the fourth longest in the past 80 years and its on track to be as long as recession in the 1970s and 80s, which lasted for 16 months. However we are still a long ways from the Great Depression, when the recession lasted for 43 months or more than 3.5 years.

In his speech on Monday, Bernanke said that it is not useful to compare the current recession with the Great Depression because that was much worse.

Here’s a fantastic graphic from the Wall Street Journal that indicates how long recessions have lasted:

Here’s a chart from Fidelity on how the stock market performs during recessions:

Comments

[jepittman:]

The chances the recession continues for another three to six months look pretty good. Beyond that looks increasingly unlikely. The last chart shows equity returns averaging 25% from the trough to the end of the recession. If this is anything even remotely close to the average recession (even allowing it to be worse than average) then it appears we are very close to a bottom in the equity markets - slightly after or slightly before the lows. Regardless of the ultimate fact (we will not know for sure until much later), It appears to me the above charts argue for positions in quality stocks and ETFs to be accumulated. There will be no bell rung at the bottom and with today's wild volatility stocks can be up huge in minutes or hours. The recession will end and when it does the market will already be much higher.

2008 Dec 02 08:28 PM

[Steven Hansen:]

it should be obvious to everyone that selection of the date of the beginning of the recession becomes important if one wants to extrapolate past events to project the future.

1) there is a large body of controversy about the dec 2008 date. there has never been a past recession where there was two quarters of economic growth (2008 q1 and q2) immediately following the first quarter of contraction (2007 q4). using this kind of logic, there is an argument that this is a continuation of the 2001 recession.

2) this comparison of the past recessions is based solely on duration totally disregarding the elements which created the recessionary environment.

3) the WLI leading indicators which look forward six months are negative (and increasing in negativity).

4) "Bernanke said that it is not useful to compare the current recession with the Great Depression because that was much worse." But it is useful to compare the elements of this recession to 1929 as they are very similar. the mere fact that bernanke must say this should tell you that the fed believes they are fighting a 1929 situation.

5) the algorithms, theories, and comparisons to past models have been disproven daily during this economic crisis. it is important to understand history, but equally important to understand when you are traveling on a new path.

this kind of presentation of data is shallow, and mirrors what i would expect to see on the front page of usa today.

2008 Dec 02 09:36 PM

[jepittman:]

(1) there will never be unanimous agreement to the NBER proclamations.
(2)The elements that create the recessionary environment are different in EVERY case.
(3)Indicators are just that:indicators. They are not infallible and can change quickly.
(4)It is highly probable that Bernanke understands what the appropriate comparisons are better than either of us.
(5)every economic crisis is different in chacacter and cause. This fact alone prevents it from fitting neatly into some historical mold.
I do not disagree that it is possible for the recession to be much longer and deeper than the average recession. I do disagree that we face another period like '29 - '33 where the contracton lasted many years. That period was caused by policy mistakes that are not being repeated today. Despite the seeming simplicity of the charts they do provide a good frame of reference that clearly illustrates where we have been in the past and what those recessions meant for the stock markets.
On Dec 02 09:36 PM The hand wrote:

> it should be obvious to everyone that selection of the date of the
> beginning of the recession becomes important if one wants to extrapolate
> past events to project the future.
>
> 1) there is a large body of controversy about the dec 2008 date.
> there has never been a past recession where there was two quarters
> of economic growth (2008 q1 and q2) immediately following the first
> quarter of contraction (2007 q4). using this kind of logic, there
> is an argument that this is a continuation of the 2001 recession.
>
>
> 2) this comparison of the past recessions is based solely on duration
> totally disregarding the elements which created the recessionary
> environment.
>
> 3) the WLI leading indicators which look forward six months are negative
> (and increasing in negativity).
>
> 4) "Bernanke said that it is not useful to compare the current recession
> with the Great Depression because that was much worse." But it is
> useful to compare the elements of this recession to 1929 as they
> are very similar. the mere fact that bernanke must say this should
> tell you that the fed believes they are fighting a 1929 situation.
>
>
> 5) the algorithms, theories, and comparisons to past models have
> been disproven daily during this economic crisis. it is important
> to understand history, but equally important to understand when you
> are traveling on a new path.
>
> this kind of presentation of data is shallow, and mirrors what i
> would expect to see on the front page of usa today.
>
>

2008 Dec 02 10:27 PM

[Peter Cooper:]

What if the policy actions do not work? I mean since when does propping up bad businesses ever work? They have to fail eventually. What there could be is a great deal of inflation - but that is playing tricks with numbers. Stock values could surge, like in Zimbabwe, while we all get poorer and poorer - or move to South Africa.

Also what value will stocks have when companies are losing money? It is not a question of low p/es but having a p/e. How much is a stock worth if it makes a loss - actually it has a negative worth because you are worse off than not owning it. What sort of profit will commodity groups make, for instance, with commodity prices off 70%? It will be the housebuilders and real estate companies all over again.

2008 Dec 03 08:35 AM

[Boubou:]

I am not reading anything in to any official comments. What they believe, and what they think is appropriate to say, are two different things.
Every comment comes from an agenda and reactions to comments are part of the equation.
A second point is that all this analysis is merely a recitation of past incidents which is only relevant if you think this situation resembles previous events in important respects.
This one is not the sun rising in the east once again.
It is unique, and any useful insight must come from analyzing this unique circumstance without leaning on the past.
And that won't work either.

2008 Dec 03 10:14 AM

[WAKEUP:]

Utterly amazing, that so many people are still looking wistfully at the past for an answer to our future. There has never been a situation as bad as the potential of the current one, across the board and in as many (all) sectors. And why does ANYONE continue to use Bernanke as a source of coherent information?

2008 Dec 03 09:02 PM