Recession : Looking up from the bottom
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 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.