David Wyss, S&P's Chief Economist, believes that the current recession likely started in March or April and will be average in duration - lasting about 11 months. In addition, he believes that as a result of huge fiscal and monetary stimuli, the recession will be shallower than average. If he is correct, what kind of performance can investors expect from stocks in the coming year?
Take a look at the table below, summarizing the six recessions since 1960. We see that in the past 40 years, recessions have been as short as six months and as long as 16 months, but averaged a bit more than 11 months. The S&P 500 has anticipated an economic downturn by an average of about six months, even though it never once actually peaked six months prior to a recession's start.
However, the market has anticipated an economic recovery by an average of about six months, or a little more than half way through. Best of all, the S&P 500 has been fairly consistent in its subsequent 12-month price performance, gaining an average of close to 30%. In addition, although not shown, growth stocks have typically outperformed value issues coming out of recessions, and small caps usually outpaced large caps.
Recession Duration (Mos.)
Date of S&P 500 Peak
# of Mos. Prior to Recession that the S&P 500 Peaked
Date of S&P 500 Trough
# of Mos. Into a Recession that the S&P 500 Bottomed
% Change in S&P 500 12-Mos. Later
4/60 - 2/61
12/69 - 11/70
11/73 - 3/75
1/80 - 7/80
7/81 - 11/82
7/90 - 3/91
Does this mean that investors should rush out and load up on high
beta beta stocks in anticipation of healthy returns? Not exactly. Wyss believes that most of the risk in this economy is on the negative side. And based on eroding earnings trends and the lack of guidance from corporate management, this recession could end up being longer and deeper than currently projected.
As a result, S&P recommends sticking with issues in sectors that continue to offer defensive characteristics, along with positive earnings and cash flows. Stovall is senior investment strategist for Standard & Poor's