Last week, stock markets rallied vigorously and so far have avoided any major plunges like we have seen in previous weeks. Has the stock market bottomed?
The S&P 500 turns up 2 to 4 months before the end of the recession according to Northern Trustand the average length of the a U.S. recession in the post-war era has been 10 months according to Bespoke Investment Management. So if the recession began in early to mid-2008, we could be near the bottom going by historical norms.
Well know when the recession officially started when the National Bureau’s Business Cycle Dating Committee makes its call. A rule of thumb is two consecutive quarters of negative growth in GDP. What can make it tricky are ongoing revisions to GDP growth figures.
Another historical norm suggesting a bottom is the typical decline seen in bear markets. Nick Majendie, a portfolio strategist at Canaccord Adamssays there have been 12 occasions since 1900 when the Dow Jones Industrial Average has been down more than 40%, and in 11 of those periods, the drop stopped somewhere between 40% and 50%.” Thats where markets were last week prior to the rally.
However, historical norms may not apply this time around considering the severity of the current financial crisis. Indeed, a recent IMF studyconcluded: Recessions preceded by banking crises last twice as long on average as those not triggered by a financial crisis, and the loss of output was about four times as great.
Bert Dohmen editor of the Wellington Letter, is bearish too: “Most bear markets, after a major bubble has burst, decline 80%-90%, going back to where the bubble started. In the United States, that’s what happened after the 1929 Crash. During the 1973-74 bear market, the broad ValueLine Index was down over 80%. In 2000-02, the Nasdaq Composite was down over 80%.