Recession Investing: The Right Time to Buy
By Dr. Steve Sjuggerud
February 12, 2008
"You mean your stocks can actually go up in recession?" my wife asked me yesterday.
She surprised me... I thought she might know this answer. Then I thought, if she doesn't know you can make money in stocks by buying during recessions, you might not know either.
"You can absolutely make money in stocks during recessions," I told her.
Today, I'll show you how. We'll use the last major recession as our starting point...
The 1990-91 recession was the last time we saw both real estate and stock prices take a hit at the same time. Officially, the recession was relatively short, only lasting about a half a year.
The chart tells the story of what happened to stocks:
As the chart shows, the stock market bottomed just about halfway into the recession... when things appeared darkest. The stock market then started to recover as things began to appear better.
In the 1990-1991 recession, stocks bottomed 71 trading days into the recession – or 42% into the recession – and had an 18% loss. The market's performance during the 1990-91 recession is fairly typical...
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On average, going back to 1950, recessions have lasted roughly 220 trading days (which is nearly a full year). That's just a bit longer than the 1990-91 recession. And stocks hit bottom right about at the halfway point on average (typically just a few days after the halfway mark). That's close to what happened in 1990-91 also.
The average fall from the start of the recession to the bottom in stocks was 19%. So once again, the 18% fall we saw in 1990-91 was in line with history.
My friend Jason Goepfert of sentimenTrader crunched these numbers. I really like Jason's work. Based on it, Jason's best guess is: "It's likely that we are in recession, and it began last quarter – suggesting we should see a major stock market low by sometime this summer."
Jason urges caution with this forecast... Recessions are actually identified in hindsight – meaning we don't know we're officially in one until we're in one. (Or in the case of the last official recession in 2001, we didn't know we were in it until it was already over.)
One important finding of Jason's is: You DON'T make money in stocks by buying the day we enter a recession and selling the day the recession is over. Stocks, on average, lose money in that time frame. You make money in stocks buying during the middle, not the beginning, of the recession.
We can't know if this recession will be shorter or longer than average (heck, we don't even know if we're in recession yet). But here's what we do know: A typical recession lasts less than a year. And the typical stock market bottom has been about six months into a recession. And you definitely make money in stocks from that point on...
One of our key ideas at DailyWealth is: You make the most money in stocks when things go from "bad to less bad." So the bottom line is, yes, absolutely, you can make money in stocks during recessions. Buying in the middle of the recession is what you want to do.
Good investing,
Steve
P.S. I'd like to thank my friend Jason Goepfert of sentimenTrader for crunching the numbers here. Jason does fantastic work, for too cheap a price. You can check out his work here: www.sentimentrader.com.
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