Recession and the Markets

Since World War II there have been ten officially sanctioned episodes that have been deemed recessions.  A recession is defined by NBER (National Bureau of Economic Research) as “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.” The average decline in real GDP from peak to trough was about 1.7%.  The Chart below shows the dates and length of the recessions:

The average of the above listed recessions comes out to a little more than 10 months.  The longest was 16 months, but most intriguing is that since 1982 the United States economy has been in a recession for all of 16 months.

Journalists have been pining for a recession for over a year and they probably now have their wish.  The depth and length of the recession will be determined by the economy, depth of the credit crisis, and the global recovery packages, not by journalists who will make this the worst recession in history and compare the economy to the Great Depression.  Certainly an average 11 month recession is severe and for many people scary, but it is not Armageddon. 

The stock market is a discounting mechanism.  The market usually declines before a recession becomes reality and usually recovers before the economic recovery starts.  For journalists, bad news is what sells and they will continue to write about this recession long after the recovery has started.  As long term investors it is important to not sway from your long term plans by reading all of the doom and gloom.  There are tremendous opportunities available in equities at the current time and we are exploring ways to take advantage of these opportunities in an effort to produce long term gains. We expect the volatility to continue, but with the volatility will come the opportunity to make gains.

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