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When Might Stocks Bottom? January 8, 2008
-------------------------------------------------------------------------------------------------------------------- This is an abbreviated sample of a comment posted for subscribers --------------------------------------------------------------------------------------------------------------------
The theme for the past couple of Data Briefs has been economic recessions, and their impact on stocks and other asset classes. With the odds clearly tilting toward a contraction, it's a topical subject.
We're going to go over stock returns one more time, then we'll leave the subject alone for awhile. This time, we're going to take a look at each of the "official" recessions, how long it took for stocks to find a bottom after a recession began, and what kind of price return there was in the interim.
The seven charts below show each of the National Bureau of Economic Research's official recessions, along with a plot of the S&P 500. The red shaded areas highlight the amount of time it took before the S&P put in at least a six-month low from the recession's beginning (meaning a price that was the lowest of any others six months before or after).
On average, the recessions lasted roughly 220 trading days, or nearly a full year. The S&P was able to find a meaningful bottom after 129 trading days, or roughly six months after recession began, and at about the half-way marker of the recessions' durations. The S&P gave up an average of 19% of its value from the recessions' starts to the six-month lows, with a range of -6% to -42% (ouch).
None of them showed the S&P bottoming earlier than 52 trading days, or later than 282 days, giving us a very rough approximation for a window on when we could expect a low this time around. That's assuming we're in recession, and know when it began.
Taking a best guess, it's likely that we are in recession, and it began last quarter - suggesting we should see a major stock market low by sometime this summer. But given the variability in the duration range of past recessions, and the unique difficulties in identifying a recession ahead of time, we have to take that kind of forecast with a big grain of salt.
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