Equities and Recessions

During the second half of March I made many phone calls to those that had previously expressed an interest in our managed account program. After making these calls I overwhelmingly found that people did not want to get back into the stock market (a contrary indicator ???). As for reason, they cited the poor economy and bad news.

At this late stage in the bear market it is a mistake to be gloomy on stocks because of the bad economy. To see why, let’s look at equity price behavior during the past recessions dating back to 1926.

Going back to 1926 there have been fourteen recessions. Looking at duration, stocks hit their low point about mid-way through the recession (after 16 months in our current recession, surely we have hit the mid-point!). That means that most of the time new bull markets start during, not after, a recession.

On average stocks increase in value during the second half of a recession. That’s right, in the second half of a recession stocks typically increase in value despite the bad news headlines. That’s because stocks get cheap during bear markets and they are forward looking.

I am much more optimistic on equities and firmly believe that investors will look back at this time and wonder why they were sellers instead of buyers.

David Vomund

As always, past performance does not guarantee future results.