We’ve analyzed recessions and market downturns going back to 1953. In that time, there have been 10 recessions, one every 5 to 6 years. You can see in Callan’s Periodic Table of Investment Returns that the sharpest rebounds in the stock market tend to occur in the first year following the end of a recession. Thus the old saying, buy when there is blood in the streets. 2009 was no exception with the Russell 2000 Growth Index skyrocketing 34.4% that year, after plummeting 34% in 2008. The run-up for the last 43 weeks of 2009 from the March lows, a moment of panic in which Warren Buffet said he had never seen a level of fear like it before, is a head spinning 127%. So, the equity markets have been on a tear for the bulk of the last 7 quarters in a row. What can we expect going forward?
In the Callan table, you will see 4 recession nadir years (1990, 1994, 2002 and 2008) in the past two decades that were each followed by a huge stock market rebound year. The resurgence years were 1991, 1995, 2003 and 2009. Ebullient equity markets lasted 2 more years, 4 more years, and 3 more years respectively, following the first three of these resurgence years. So, if the recovery that began in 2009 follows the pattern of the last three recoveries, we can expect 1 to 3 more years of buoyant equity markets before the next major downturn.
Bottom line: The headwinds continue to be significant, with intractable unemployment and huge public and private debt burdens plaguing the economy. But like Lance Armstrong on a steep mountain stage of the Tour de France, the markets love to climb a wall of worry When the problems are easily identified and widely noted in the media, that is often a good indicator that plenty of money remains on the sidelines waiting to come back into the equity markets and drive them higher. Thus, some judicious long exposure is warranted. With respect to the huge run-up that equities have experienced in the past 7 quarters, a healthy allocation of hedging in portfolios is also prudent at this time.