Joined Jan 1, 1970
509 Blog Posts

The Market Has Bottomed !!

Headlines like that are made to be scoffed at, no?

The fact of the matter is, we need to look at the economic data along with the chart action to confirm a bottom.

Wonder of wonders, we are now in a recession. Who’d have thought? Thank you, NBER!!

When we look at previous recessions that might be comparable to the one we find ourselves in, we see that the recession of the mid-1970s, which included the 1973-74 bear market, lasted 16 months and lowered GDP by 3.1%, peak to trough. The stock market bottomed 6 months before the end of that recession. Twelve months after the bottom, it was up more than 30%.

The 1980s gave us the old “double-dip” recession that lasted 6 months (from January – July 1980), followed by a longer recession (Part II) that lasted 16 months from July 1981 to November 1982. Combined, both recessions lopped off about 4.8% off of GDP. The second part seems most relevant in terms of time lines. In that case, the market bottomed 4 months before the end of the recession. It was up by 52% over the 12 months that followed, and kicked off the last great bull market of the 20th Century that ended with the tech wreck.

Of course, you can’t mention recessions without bringing up “The Big One”. The Depression of the 1930’s lasted from August 1929 to March of 1933, which was forty-three months in duration, and hacked 26.6% off of GDP, peak to trough! (Now THAT, my friends, is the mother of all contractions!) Seriously, I can’t fathom how we arrive there again, unless one-third of the population of the U.S. is unemployed or killed off by the plague. This mammoth recession was followed by yet another recession four years later, from May 1937 to June 1938, which sliced off 2.6% from GDP and lasted 13 months. No wonder many of our grandfathers ended up grumpy old men.

Now that we are about 12 months into this recession, and assuming that this isn’t “The Big One, Part II”, how much more jail time do we have to serve?  Well, if it’s like the mid-1970s, or part II of the early-1980s double-dip, we have about 4 months left on the recessionary clock.

On both of those occasions, which were severe economic contractions, the stock market bottomed 4-6 months before the end of the recessions. If the timelines offered by those scenarios are relevant for today, we would expect the market to begin to bottom right about…….now.

But let’s not be so optimistic. Let’s allow for a margin of error, and extend the time line farther out into 2009. Better still, prudence might dictate that we wait for the leading economic indicators to stabilize before calling a bottom.

The main takeaway from all this is that markets historically bottom 4 – 6 months before the end of a recession. And, if you do the research, you’ll see that most of the leading indicators turned up, along with the market, thus confirming that a bottom had in fact been put in. 

While this might look like a bottom, we may not be quite there yet before we get a sustained recovery. None of the economic indicators are telling us that the recession, or the market is bottoming out. 

The key then, is to watch what the leading economic indicators are telling us and combine that with chart studies. Taking that approach might make you a little late to the “all-in” bulltard party, but could also save you  from getting whipsawed yet another time.  

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