Data Brief - When Might Stocks Bottom?

When Might Stocks Bottom?

Tuesday, January 8, 2008

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.