The stock market has had a really rotten recession. It never has a good one, of course. But the drop in the DJIA from the cycle peak in this recession is the worst in at least 48 years.
As ‘March madness’ is upon us, it is a good time to remember the words of New Yorker and former NC State basketball coach Jim Valvano. At a gathering for the Espy awards while fighting a losing battle against a virulent and advanced form of cancer Valvano declared his intention to fight it to the end and urged every to ‘Don’t give up - don’t ever give up’. These words from the feisty, inspirational and combative Valvano are essential for stock market investors to remember. Let them ring in your ears.
Crime, Punishment and Restitution
While stocks fall in recessions they also bounce back sharply when recessions end. And while a lot of financial advisors are telling people that if they can’t afford to lose any more money they should pull out, investors must weigh that advice against the prospect for a sharp market recovery after what are in February nearly 16 months of recession. In the Post- War period it’s about as long as any recession has lasted. That does not mean this one has to end next month but it reminds you that a great toll has been taken on the economy and that by this time the economy is usually in recovery. And we should be reminded that… as much has been done by the Fed and the administration to turn this around as in any previous recession in the last 50 years. Sure there are some special problems, too.
You should be reminded that some indicators are stirring. Job losses are bad but are not worsening- the low point for the pace of job losses was in December. Jobless claims may have peaked. There is a lot of stimulus money being spent and the government is crudely (yes) poorly (yes) but also pretty clearly, backstopping financial institutions removing the threat of a recession turning to depression from some domino effect on failing financial institutions. Ya got a lot o’potential So look at the opportunity. In the worst recession’s recovery in about the last half-century, stocks rose from the cycle low to their first month of recovery by 14.1% - over a period of four months. That was the worst performance for stocks as recovery took hold. Stocks made their biggest drop from the cycle peak (using monthly DJIA data) and fell 38.3% in 1973. Then, in that same cycle, rose 33% from their low in the final three months of recession and one month of recovery (yes 33% in four months). The longest recessions 1973-75 and 1981-82 produced the largest end-of-recession gains in the stock market. So bear that in mind as this recession looks set to surpass them in length and has already surpassed them in terms of the market plunge.
No risk, no reward - We cannot be sure that we have seen the bottom in this market yet although the DJIA and other indices are off from their respective peaks by over 50%. Yet, because certain economic series are slowing their pace of decline and hinting at a recovery it is probably as good a time as ever to turn in the bear suit. ‘Trees do not grow to the sky’, the saying goes, and neither do stock markets fall to China (or from China to the US either, for that matter).
Things are only as grim as you make them.