Why An ‘Official’ Recession Could Be Bullish

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December 2, 2008

The National Bureau of Economic Research confirmed the mother of all our collective fears yesterday when they said we’re officially in a recession. Of course, the market reacted with hysteria; the Dow suffered its twelfth-biggest percentage loss ever.

As understandable as the selloff was in light of the news, it may have ultimately been a mistake. How so? Let’s just say our friends at the National Bureau of Economic Research are wise to be careful and thorough, but their timeliness stinks - badly.

We’ve looked at this idea before … the market can start to recover right when it becomes completely certain the economy is wrecked. That’s because stocks are priced at perceived future values, where economic data is already history by the time we hear it. In other words, there’s not actually a high degree of market/economy correlation.

Since the National Bureau of Economic Research (or NBER) made the idea a lot more relevant for us by kicking-off December with a dose of dubious news, we thought it would be fitting to see just how ‘bad’ a recession could be for stocks once the NBER finally got around to confirming one was in place.

Just to be clear, we’re not interested in when the official recession began. The current recession technically began in December of 2007, but unless you have a time machine, the official start date doesn’t matter. As investors, the only information we can process is the information we have right now. The question is, does it do you any good to get that historical information now?

Well, not only does it not do you any good to get information months after the fact (a year later, in this case), it may actually be detrimental to take it at face value.

On the nearby chart we’ve listed the date of the official announcement of recent recessions, and then added the return of the Dow Jones Industrial Average over the next six months, and the next twelve months.

Just for fun, in the last column we’ve added the date of the announcement that the recession was over for each case. You may want to pay special attention to how long it took the NBER to get around to saying each recession was over; in some cases it was more than a year later, and stocks had sky-rocketed in the meantime.

Pretty eye-opening, isn’t it?

Just to be fair, and clear…

We’re not trying bust the NBER’s chops. It’s not their job or obligation to tell anybody in a timely manner that a recession has started. Their focus is strictly an academic one, even though they’re largely heralded as the final authority on the matter.

And, we’re not saying we should all go out and buy stocks today just because the odds suggest we should. This year has been somewhat incomparable to any other year, and may well end up being an exception to the norm. Even if we were saying this was a reason to buy though, we couldn’t stress enough that this would be a long-term buy signal … as in months if not years.

We’re simply pointing out - once again - that just because the media reports something doesn’t make it meaningful, and just because the market initially responds with a certain opinion doesn’t make that response the right one. Think for yourself, and weigh your own odds.

With that said, there’s one more point to make about recessions and the market in general…

Let’s not even worry about the official announcement date of a recession for the time being; let’s just examine the official beginning and end date of the last few recessions.

According to the NBER’s data, since 1950 there have been nine official recessions, not counting the one we entered last December. Had you put money into the Dow Jones Industrial Average right in the middle of the recessionary period - the supposed ‘turning point’ - you would have actually gained an average of more than 20% over the following twelve months. Take a look at the table for the specifics.

Obviously only the gift of hindsight lets us know where the exact ‘middle’ was in each instance. The bigger point is still the same though - wading into the water when nobody else was willing to do so has historically doled out nice rewards to the few brave souls who did.

Maybe the NBER’s official recession call is indeed a time to buy into long-term positions. We’re under no illusion that doing so wouldn’t require lots of intestinal fortitude right now, but the odds favor the strategy.

We also don’t yet know if we’re actually at the halfway point of the current recession, but we do know we’re at least twelve months into it. If we’re not at the midpoint yet, then this is going to be one long recession … but we don’t think that’s the case. Though this contraction feels different than all the rest, the symptoms aren’t really all that unusual even if the severity is.

To reiterate our message though … think for yourself, and weigh your own odds. The mainstream media can miss the boat, and cause you to miss it too.

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