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'Official' Recession Announcement Can Be Bullish? |
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The
National Bureau of Economic Research confirmed the mother of all our collective
fears yesterday when they said we're officially in a recession.
Of course, the market reacted with hysteria; the Dow suffered its twelfth-biggest
percentage loss ever.
As understandable
as the selloff was in light of the news, it may have ultimately
been a mistake. How so? Let's just say our friends at the National
Bureau of Economic Research are wise to be careful and thorough, but
their timeliness stinks - badly.
We've looked
at this idea before ... the market can start to recover right when it becomes
completely certain the economy is wrecked. That's because stocks are priced
at perceived future values, where economic data is already history
by the time we hear it. In other words, there's not actually a high
degree of market/economy correlation.
Since the National
Bureau of Economic Research (or NBER) made the idea a lot more relevant
for us by kicking-off December with a dose of dubious news, we thought
it would be fitting to see just how 'bad' a recession could be for stocks
once the NBER finally got around to confirming one was in place.
Just to be clear,
we're
not interested in when the official recession began. The current
recession technically began in December of 2007, but unless you have
a time machine, the official start date doesn't matter. As investors,
the only information we can process is the information we have right
now. The question is, does it do you any good to get that historical
information
now?
Well, not only
does it not do you any good to get information months after the
fact (a year later, in this case), it may actually be detrimental to
take it at face value.
 On
the nearby chart we've listed the date of the official announcement of
recent recessions, and then added the return of the Dow Jones Industrial
Average over the next six months, and the next twelve
months.
Just for fun,
in the last column we've added the date of the announcement that the recession
was over for each case. You may want to pay special attention to how long
it took the NBER to get around to saying each recession was over; in
some cases it was more than a year later, and stocks had sky-rocketed in
the meantime.
Pretty eye-opening,
isn't it?
Just to be fair,
and clear...
We're not
trying bust the NBER's chops. It's not their job or obligation
to tell anybody in a timely manner that a recession has started. Their
focus is strictly an academic one, even though they're largely heralded
as the final authority on the matter.
And, we're
not saying we should all go out and buy stocks today just because the odds
suggest we should. This year has been somewhat incomparable to any
other year, and may well end up being an exception to the norm. Even if
we were saying this was a reason to buy though, we couldn't stress
enough that this would be a long-term buy signal ... as in months,
if not years.
We're simply
pointing out - once again - that just because the media reports
something doesn't make it meaningful, and just because the market
initially responds with a certain opinion doesn't make that response the
right one. Think for yourself, and weigh your own odds.
With that said,
there's one more point to make about recessions and the market in general...
Let's not even
worry about the official announcement date of a recession for the time
being; let's just examine the official beginning and end date of the last
few recessions.
 According
to the NBER's data, since 1950 there have been nine official recessions,
not
counting the one we entered last December. Had you put money into the
Dow Jones Industrial Average right in the middle of each recessionary
period - the supposed 'turning point' - you would have actually
gained an average of more than 20% over the following twelve months. Take
a look at the table for the specifics.
Obviously only
the gift of hindsight lets us know where the exact 'middle' was in each
instance. The bigger point is still the same though - wading into the
water when nobody else was willing to do so has historically doled out
nice rewards to the few brave souls who did.
Maybe the NBER's
official recession call is indeed a time to buy into long-term positions.
We're under no illusion that doing so wouldn't require lots of intestinal
fortitude right now, but the odds favor the strategy.
We also don't
yet know if we're actually at the halfway point of the current recession,
but we do know we're at least twelve months into it. If we're not
at the midpoint yet, then this is going to be one long recession ... but
we don't think that's the case. Though this contraction feels different
than all the rest, the symptoms aren't really all that unusual even if
the severity is.
To reiterate
our message though ... think for yourself, and weigh your own odds.
The
mainstream media can miss the boat, and cause you to miss it too.
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Updated: 8:15 pm PDT (03:15 GMT), November 2, 2010
