Recession Could Be Boon for Stocks - WSJ

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 |  Includes: DIA, IEF, QQQ, SPY
by: SA Eli Hoffmann

While a U.S. economic recession isn't yet official, many pundits say it's either imminent, or that it is already here. On Sunday, the Wall Street Journal's Greg Ip posted an informative Q&A, entitled, "What a Recession Could Mean to You." Salient excerpts follow:

What is a recession?

The generally accepted arbiter of when U.S. recessions begin and end is the "business cycle dating committee" of the 87-year old National Bureau of Economic Research, a non-profit group based in Cambridge, Mass., that is made up of 600 academic economists. The NBER defines a recession as "a significant decline in economic activity spread across the economy, lasting more than a few months"... A popular rule of thumb says a recession is two consecutive quarters of shrinking GDP.

Are we in a recession?

We won't know for sure unless the NBER announces it... But there are some indicators that are not flashing recession. Employers have not trimmed employee work weeks... Initial claims for unemployment insurance have actually dropped so far in January. Perhaps most important, inventories are not unusually high, which makes it less urgent for manufacturers to scale back production.

How long could a recession last?

Recessions have gotten shorter and less frequent since 1945, averaging just 10 months. And the two last recessions were among the shortest and mildest on record; both the 1990-1991 downturn and the 2001 recession lasted just eight months.

How will the stock markets do?

In all but one of the past 11 rate-cutting cycles (including several when a recession didn't materialize), the Standard & Poor's 500-stock index has risen -- advancing an average 17% in the 12 months after the Fed starts to cut rates... If pre-2001 patterns hold, that suggests the next eight months could end up being good for stocks.