Don't Wait for the Official End of the Recession

In his latest annual report to shareholders, Guru Charles Royce published some interesting statistics:

All the figures reflect cumulative total returns from the official start of the recession [a date only known after the fact] and through the last month of the recession as determined by the resumption of GDP growth. That date, by definition, is also known only after the fact.

There was no consistent over or under performance as related to cap size. What was glaring, though, was that 7 of the 8 measured total returns DURING the recessions were nicely positive numbers. Even the one negative was very minor.

Also noteworthy was the average duration of the most recent four recessions - an average of 9.5 months start to finish. Three of the four were eight months or less.

If the US entered a recession late last year [as is likely based on empirical data that has come in since year-end 2007], then we may very well be close to halfway through this latest one.

Since stock markets are leading indicators, we could be set for a pick-up in the averages pretty soon if this recession lasts the typical 6-9 months from inception.

Moral: Don't wait for the official end of the recession to load up on bargains. Share prices typically start rising about 6 months before the proclamation that "The Recession is Over" hits the airwaves.

Comments

[The GreatDepression08]

Thomas Jefferson was concise in his early warning to the American nation,
“If the American people ever allow private banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the people of all their property until their children will wake up homeless on the continent their fathers conquered.”

[ponchovilla]

Guru's sure do have fun with numbers to prove their point:

S&P 500
Mar 00 1498
Mar 01 1160 Recession begins
Nov 01 1139 Recession ends
Nov 02 936 Oooops. The Recession was over one year ago.

[galewhitaker]

Paul
I believe we have passed peak oil. I believe that the light that you see at the end of the tunnel is really a frieght train coming your way. I think that the advice you gave in your blog indicates that you are long the market. This kind of advice is very dangerous for the small investor who is trying to gather enough sheckles to retire. The longest recession in history lasted 4 years and the problems at that time were no where near as serious as the problems we face today.
The Cynic

[ponchovilla]

Must be the title was truncated, eh?

Don't Wait for the Official End of the Recession...To See The Value of Your Investments Decrease

Just follow a guru blindly and lose more money

[Eaise]

I would love to believe your perspective is accurate. Instead though, I think it is a dangerous invitation to the small guys on main street to prematurely get back in the market and lose what's left of thier shirts. The issues facing us today are far more complex than they were in the time periods you cite.

[Kunst]

But we haven't even had the official start of the recession yet! Peak to trough is what I care about. Peak was October 2007. Trough is/will be when? Not for a while yet, in my opinion.

[gruenetulpe]

Very well! Interesting, as your other articles. When politicians start denying we are in a recession you can bet you are in it already, but this is a very positive outlook - although I fear this one might be one of the more severe ones..!

[Paul Price]

Steven Leuthold, founder of Leuthold Weeden Capital Management is widely considered by his Wall Street peers as an asute market historian and an independent thinker.

-- BusinessWeek Magazine

BW says Leuthold's claim to fame is his reputation for rigorous quantitative work and sense of market history. He got his clients out of stocks in the summer of 1987 and was a leading voice against dot-coms before the bubble burst in 2000.

He manages $4.8 billion in mutual fund and private assets. Leuthold's Grizzly Short Fund was up 14% YTD when the interview with BW took place [published in the April 21st edition].

BusinessWeek asked him:

Q) When might stocks rebound?

A) If the recession lasts 16 months - that would be a long one. Based on the usual relationship of market bottums in a bear market we would see the lows in August. If it's an 11-month recession, we would see a market bottom in May or June.

Q) In late January you went from 30% to 50% in stocks. What changed?

A) We got to median valuation levels of 17.1 times earnings for the S & P 500 on a rolling 5-year basis. 70% of the time during a bear market the decline stops around that median level. That was the case in 1967, 1987 and 2002. It did go lower in 1973-74 with 13% inflation and 15% interest rates. I don't think that will happen this time- sanity will prevail.

BusinessWeek- This is a pretty optimistic scenario.

Leuthold- People say we haven't seen anything like this before. They just haven't looked.

[Paul Price]

Notice how much the markets have rallied since March 20th.

Point made.