It seems that the US market is pricing a fully-fledged recession. Off course it will be up to the National Bureau of Economic Research (NBER) to formally call a US recession, but I am tipping that this 'recession' will become statistically apparent by the end of this December quarter.
So does this finally give us clarity of when we might expect a market bottom for equities in the US (and, by default, that little old Aussie symbiotic beasty called the ASX)?
Consider the following bit of research and, in particular, the graph that tracks the S&P 500 performance vs the recessionary business cycle (the source is quoted in the article extract) :
Where there does appear to be more consistency is with the pattern of returns for the market around recessions, if not the magnitude. As you can see in the chart below, which combines all of the 10 prior recessions into a single average line, the market has typically peaked about seven months before the recession begins, but bottoms quite decisively by about six months into the recession, with an average peak-to-trough decline of just under 25%.
S&P 500 Performance Pattern Around Recessions
Indexed price-only data from 1947-March 31, 2002. Source: Ned Davis Research, Inc.
In fact, some of the best bear market bottoms and/or historic buying opportunities have come during the depths of recessions. Note in the table below the performance averages for the market during various periods following stock market troughs in recessions.'
So, given that we are due to be at the start of humdinger of a US recession by January 2009, does this mean we can expect a 'decisive bottom' around June 2009? That will be at the height of 'real economy' phase of this gawd awful 'credit crunch' ie unemployment @ 8%, business insolvency ups, property valuations bottom etc.
What do people think?
My view (long-term strategy only):
Contrarians/perma bulls will be buying now, sophisticated investors will be buying March/April and institutions will know the extent of the down turn and buy up mid-next year. Ma & Pa will still be hiding under their beds until the bull is re-stablished sometime in December 2009/January 2010.
So bottom will be June 2009. Oh boy...