Recession : Looking up from the bottom

DEALING WITH RECESSION CONCERNS : What to do?

Instead of giving in to panic or radically changing your investment strategy in order to become more defensive, you need to remember that:

After the major stock index downturn given the response from monetary, tax and regulatory authorities, the biggest part of the correction may already be behind us.
The stock market generally anticipates slowdowns, as illustrated by the chart (above) and the graph (at left).
The stock market generally bounces back before the trough in economic activity occurs.
Staying invested, maintaining a healthy level of diversification and routinely rebalancing your portfolio is still the best strategy over the long run.

The word " recession " has been cropping up in recent economic and financial news. Although it is used often, this term is rarely defined, and its impact on a portfolio is frequently misunderstood. Understanding this phenomenon and its effects can help you in making decisions regarding your portfolio.

Recessions in the United States: the impact on stocks

FROM A HISTORICAL PERSPECTIVE: IMPACT OF RECESIONS
A recent analysis of some historical data by Merrill Lynch^[1] shows how stock markets react to recessions:

There have been 10 recessions in the United States since the end of World War II.

Each one has lasted 10 months on average (ranging from 6 to 16 months).

Generally, the S&P 500 has peaked 3-6 months before the start of the recession and has declined 20% or more from that peak by the end of the recession.

The market anticipates the economy and typically bottoms out 3-6 months before the recession ends.

1. Merrill Lynch Economic Analysis, January 28, 2008.