Examining history provides some degree of insight during times of financial market losses. The same is equally true during times of gains but somehow perhaps due to human nature we never get around to examining history when the value of our investments are going up only when they have already gone down. In light of the recent 35ish% drop in the stock market I have my eye open for articles that compare our current situation with those from the past. Many say that we should compare the current situation to that of the 1930’s although this could be overly pessimistic. History provides a great learning opportunity in all areas of life especially the most painful ones.
Barron’s recently featured an article comparing the current market correction and economic environment to similar historical conditions. According to the article the average U.S. recession since the late 1940’s has lasted 10 months. Stocks usually reach their low point around 3 months before the recession ends. Many economists now believe that the recession began July 1. If that is the case and the average historical recession lasts 10 months that would put the current recession ending in early April 2009. This means that based on past numbers the stock market bottom would occur 3 months prior to April which would be early January 2009.
While recessions historically have lasted 10 months five recent recessions were shorter with the recession in 1980 lasting only 6 months according to Bespoke Investment Group. If this happens again the stock market bottom could occur sooner than January. If we do the numbers on a similar scenario the bottom would occur this month.
Articles suggesting that a bottom occurred last week are numerous. According to the New York Times Warren Buffett stated that he was moving his money into the U.S. stock market. He said “A simple rule dictates my buying: Be fearful when others are greedy and greedy when others are fearful. Fear is now widespread.” He cautioned that he has no idea what the market will do in the short term but that it will turn up before the economy does. Point well taken.