Saturday, February 09, 2008

The Anatomy of a Recession and the Market

Generally the stock market is a fairly good predicator of future activity as it relates to the economy or individual stocks or stock sectors. If that is the case, what might recent market declines suggest about current and future economic activity?

Many economists and traders believe the economy is near or already in some type of slowdown or even a recession. As Liz Ann Sonders, Chief Investment Strategist at Schwab recently noted:
"Cementing many a recession forecast was the most recent jump in the unemployment rate to 5%, bringing the total increase from this cycle's low to 0.6%. That may not sound significant, but an increase of this magnitude has never occurred in a soft landing, only during recessions."
What has historically been evident is the markets anticipate periods of economic weakness. If this is the case, then maybe the worst of the market performance is behind us. As noted in the last column of the table below, significant returns have been the result "after" the recession begins through a period six months after the end of the recession.

(click on table for larger image)

market performance around recessions
Graphically, the average S&P 500 performance during the past nine recessions is detailed below.

market anticipates recession
Looking Through the Valley to Recovery
Charles Schwab & Co.
By: Liz Ann Sonders
January 18, 2008

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