How to Make a Recession
Work for You
By Ian Davis, editor, Quant Trader
February 11 , 2008
You're going to think I'm crazy, but bear with me...
Stock markets often rise during recessions.
That's right... Believe it or not, the Dow Jones Industrial Average rose in at least four and up to nine of the last 11 recessions. (Why the uncertainty? Because it's impossible to assign a specific start or end date to a recession... the closest anyone gets is the start month.)
We may be headed for – or we may currently be in – the starting month of a new recession.
Alarm bells are going off all over the place... Unemployment was up from 4.4% to 4.9% last month, the growth of real income is slowing (it usually rises 3.3% year-over-year, but has slowed to only 2.1% in the last three months), and the U.S. gross domestic product (GDP) is stagnating.
However, if we are beginning a recession, it probably won't be as damaging to the stock market as many investors think... at least not going forward.
Let's take a look at the data...
According to the National Bureau of Economic Research (NBER), the U.S. has suffered 11 recessions since the end of World War II.
The NBER defines a recession as a "significant decline in economic activity spread across the economy, lasting more than a few months." To gauge activity, the NBER looks at real GDP (real meaning the data has been adjusted for inflation), real income, employment, industrial production, and wholesale-retail sales.
The following table shows the last 11 recessions as defined by the NBER. It also shows the maximum and minimum returns for each recession (depending on exact buy and sell dates).
Recession |
Dow Jones |
S&P 500 |
Nasdaq |
Peak |
Trough |
Min |
Max |
Min |
Max |
Min |
Max |
Feb 45 |
Oct 45 |
14% |
22% |
|
|
|
|
Nov 48 |
Oct 49 |
-4% |
11% |
|
|
|
|
Jul 53 |
May 54 |
16% |
22% |
14% |
21% |
|
|
Aug 57 |
Apr 58 |
-13% |
-3% |
-14% |
-1% |
|
|
Apr 60 |
Feb 61 |
1% |
10% |
8% |
17% |
|
|
Dec 69 |
Nov 70 |
-6% |
3% |
-11% |
-2% |
|
|
Nov 73 |
Mar 75 |
-22% |
-4% |
-24% |
-10% |
-33% |
-18% |
Jan 80 |
Jul 80 |
-1% |
14% |
0% |
16% |
-2% |
18% |
Jul 81 |
Nov 82 |
2% |
15% |
2% |
13% |
0% |
13% |
Jul 90 |
Mar 91 |
-5% |
3% |
-1% |
7% |
-3% |
10% |
Mar 01 |
Nov 01 |
-15% |
6% |
-14% |
4% |
-22% |
7% |
|
You should take away a few interesting points from this table...
First, the large blue-chip companies of the Dow hold up better during recessions than the S&P 500 or the tech-heavy Nasdaq.
Also, assuming you didn't pick the best or the worst time to get into the market... your holdings would only have fallen about half the time (based on the average monthly price during the start and end months). In other words, these indexes rallied about half the time.
These rallies happened because stock markets are predicting machines. They reflect the present and future economic situation. Once the economy slips into a recession, the stock market is already looking ahead to better times.
So the next time you hear the talking heads on CNBC lamenting the state of the economy, you may want to get ahead of the game and start loading up on stocks... especially heavily discounted blue chips.
Good investing,
Ian Davis
