An Empirical Examination of Recessions

The enactment of a $787 billion stimulus package into law on February 17th provided little respite for a stock market that is flush with poor economic news and gloomy prospects. Minutes released from the Federal Open Market Committee (FOMC) meeting held at the end of January revealed that the group of policy makers believed a gradual recovery in the economy will not likely begin until the second half of 2009. In hindsight, it may seem apparent to investors that they should have reduced their exposure to stocks as the current financial crisis began to unfold. Additionally, investors may be considering reducing equity exposure now in hopes of avoiding further losses with the notion that they can always re-enter the market after the economy is back on track. We examined the last nine recessions occurring post 1950 to see if that would be a reasonable approach. Figure 2 provides the market returns experienced during each of the last nine recessions along with the returns experienced from each market bottom to six months after the official end of each recession. In every recession the market bottomed while the economy was still contracting. You may find the results to be counterintuitive; the data should give you serious pause if you are considering a retreat from equities at this point.


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