A Merrill Lynch report from David Rosenberg yesterday entitled Recession Roadmap gave us an exceptional overview of the current global economic situation. The piece is comprised of over 90 historical charts on a host of key metrics. With very little text or spin, these pictures paint some valuable perspective. Everyone should take a look; even a quick scan offers an enlightening overview.
One of the more important take-aways is that the stock market has historically bottomed about 60-70% of the way through each economic downturn or recession (see chart 16 of the Rosenberg report). Since World War II the average recession has lasted 10 months. This means the stock market has typically bottomed well before the overall economy but not before some 6 to 7 months of economic contraction.
Presently our best estimate is that the current US contraction began in December 2007. If we were to get an average run-of-the-mill contraction this time it would last until October 2008. A 10 month contraction would suggest a stock market bottom this time in and around June or July 2008.
Optimists who are declaring January 2008 as the market bottom this cycle are doing so after only 1-2 months of contraction. If that is the case it would be a most incredible bottom indeed!
But the real shock will come if this downturn goes on longer than the average. If this economic downturn proves more like the 16 month-1973-74 variety, then this would suggest a stock market bottom some time in October-November 2008. In addition, stock market declines, during longer than average contraction periods, have historically been in the 45% range; much deeper than the average 28% decline of shorter contractions.
And what of Canada and our beloved commodities-based economy? Aren't we protected or shielded during US market downturns? Sadly, the answer has always been, no. Our stock market has historically corrected more than the US during each cycle down turn. Infact this has been the case even where the Canadian economy has managed to “decouple” from the US and not enter a classically defined recession. We should note that during the longer-version US bear markets of 73-74, or '00-'02, Canada never officially entered a recession and still our stock market lost about half of its value.
So we should be careful of holding blind-hope for an incredible bottom. It seems that lasting bottoms have never come quickly, but rather have ground investors down over time.
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