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How to Make a Recession

By Ian Davis
Monday, February 11, 2008

You're going to think I'm crazy, but bear with me...
 
Stock markets often rise during recessions.
 
That's right... Believe it or not, the Dow Jones Industrial Average rose in at least four and up to nine of the last 11 recessions. (Why the uncertainty? Because it's impossible to assign a specific start or end date to a recession... the closest anyone gets is the start month.)
 
We may be headed for – or we may currently be in – the starting month of a new recession.
 
Alarm bells are going off all over the place... Unemployment was up from 4.4% to 4.9% last month, the growth of real income is slowing (it usually rises 3.3% year-over-year, but has slowed to only 2.1% in the last three months), and the U.S. gross domestic product (GDP) is stagnating.
 
However, if we are beginning a recession, it probably won't be as damaging to the stock market as many investors think... at least not going forward.
 
Let's take a look at the data...
 
According to the National Bureau of Economic Research (NBER), the U.S. has suffered 11 recessions since the end of World War II.
 
The NBER defines a recession as a "significant decline in economic activity spread across the economy, lasting more than a few months." To gauge activity, the NBER looks at real GDP (real meaning the data has been adjusted for inflation), real income, employment, industrial production, and wholesale-retail sales.
 
The following table shows the last 11 recessions as defined by the NBER. It also shows the maximum and minimum returns for each recession (depending on exact buy and sell dates).
 
Recession
Dow Jones
S&P 500
Nasdaq
Peak
Trough
Min
Max
Min
Max
Min
Max
Feb 45
Oct 45
14%
22%
Nov 48
Oct 49
-4%
11%
Jul 53
May 54
16%
22%
14%
21%
Aug 57
Apr 58
-13%
-3%
-14%
-1%
Apr 60
Feb 61
1%
10%
8%
17%
Dec 69
Nov 70
-6%
3%
-11%
-2%
Nov 73
Mar 75
-22%
-4%
-24%
-10%
-33%
-18%
Jan 80
Jul 80
-1%
14%
0%
16%
-2%
18%
Jul 81
Nov 82
2%
15%
2%
13%
0%
13%
Jul 90
Mar 91
-5%
3%
-1%
7%
-3%
10%
Mar 01
Nov 01
-15%
6%
-14%
4%
-22%
7%
 
You should take away a few interesting points from this table...
 
First, the large blue-chip companies of the Dow hold up better during recessions than the S&P 500 or the tech-heavy Nasdaq.
 
Also, assuming you didn't pick the best or the worst time to get into the market... your holdings would only have fallen about half the time (based on the average monthly price during the start and end months). In other words, these indexes rallied about half the time.
 
These rallies happened because stock markets are predicting machines. They reflect the present and future economic situation. Once the economy slips into a recession, the stock market is already looking ahead to better times.
 
So the next time you hear the talking heads on CNBC lamenting the state of the economy, you may want to get ahead of the game and start loading up on stocks... especially heavily discounted blue chips.
 
Good investing,
 
Ian Davis




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Market Watch
Symbol Price
Change
52-Wk
S&P 500 1221.53 +1.3% +10.1%
Oil 37.77 +1.5% -2.8%
Gold 135.20 -0.1% +13.4%
Silver 27.93 +0.4% +47.9%
US-Dollar 80.67 -0.8% +8.1%
Euro 1.32 +0.6% -12.1%
Volatility 19.39 -9.2% -8.2%
Gold Stocks 564.53 +1.3% +10.6%
10-Year Yield 3.00 +1.4% -9.6%

World ETFs
Symbol Price
Change
52-Wk
USA 122.56 +1.3% +10.2%
Canada 30.44 +1.3% +13.8%
Russia 21.63 +2.3% +16.7%
India 37.73 +1.9% +20.0%
Israel 16.47 +0.9% +9.7%
Japan 10.58 +1.0% +7.4%
Singapore 13.88 +1.0% +19.2%
Taiwan 14.72 +1.6% +17.8%
S. Korea 56.56 +1.7% +22.8%
S. Africa 70.85 +3.9% +22.9%
China 45.06 +1.4% +0.1%
Lat.America 52.82 +1.4% +6.7%

Sector ETFs
Symbol Price
Change
52-Wk
Oil Service 136.18 +1.5% +14.8%
Big Pharma 64.13 +0.6% -3.3%
Internet 72.13 +0.7% +22.3%
Semis 16.03 +2.1% +28.9%
Utilities 31.21 +0.3% +1.6%
Defense 18.51 +1.3% +10.1%
Nanotech 9.99 +1.3% +0.0%
Alt. Energy 9.95 +1.4% -4.4%
Water 18.31 +1.1% +12.2%
Insurance 16.07 +1.2% +18.3%
Biotech 20.58 +1.1% +27.1%
Retail 19.65 +0.1% +28.4%
Software 24.59 +0.9% +24.1%
Big Tech 53.73 +1.0% +21.9%
Construction 12.99 +2.1% +13.3%
Media 13.57 +1.1% +25.0%
Consumer Svcs 67.26 +0.8% +23.3%
Financials 54.87 +2.4% +5.2%
Health Care 64.22 +0.7% +1.3%
Industrials 63.25 +1.6% +19.7%
Basic Mat 73.57 +1.6% +21.6%
Real Estate 55.24 +1.4% +23.8%
Transportation 91.17 +1.4% +25.6%
Telecom 22.48 +1.1% +17.1%