The Recession's End Appears Near
By Gus Krafve
July 6th, 2009
We are in the longest recession of the post-war era, surpassing the early 1980’s recession which lasted 16 months. However, the latest economic and market data is suggesting the current recession appears to be nearing an end. In the post-war era, there have been eleven recessions, or roughly one recession every six years. With the stock market up over 40% since the March lows, investors are pricing in an end to this recession. We have analyzed the data from the previous ten recessions to help us determine what we can expect once it is declared the recession is over. Using data from Ned Davis Research, we have arrived at the following conclusions:
1) Rising consumer sentiment is a harbinger for the end of this recession. Sentiment is decidedly more optimistic now than during the lows of early March. The widely followed University of Michigan Consumer Sentiment Index has been up four straight months. This survey is an important leading economic indicator to watch as consumer spending comprises 60%-70% of the GDP. On average, this index bottoms two months before the end of a recession.
2) It is very likely the recession could officially end this summer. The stock market typically reaches its low between 4-5 months before the end of a recession. We are assuming March 9 was the low of the market.
3) The stock market should trend higher over the next year. The market has rallied subsequent to the end of nine of the last ten recessions. The exception was the recession of 2001, a period of time when the market was correcting from the most significant stock market bubble in the post-war era. The average gain for stocks 6 and 12 months following the end of a recession is 9% and 14%, respectively. Of the previous ten recessions, the market performed the best following the end of the recession in 1958; the performance 6 and 12 months following was 17% and 32%, respectively.
4) Investment grade corporate bonds should continue to outperform government treasuries. Fixed income investors are sending a clear signal that the recession is coming to an end. Since bottoming in December, these investments have outperformed treasuries in 2009. On average, this asset class bottoms two months before the end of a recession.
5) Institute for Supply Management’s Purchasing Managers Index (PMI) indicating we are close to GDP expansion. This index is widely followed and gauges the strength of the manufacturing economy. It has been trending higher since December, when the index reached a low of 33. Historically, a reading above 44.5 indicates expanding GDP; the latest reading came in at 42.8. This index tends to reach its low 2-3 months before the end of a recession.
An end to this recession doesn’t mean we are going back to the way things were. The U.S. consumer continues to reduce debt and increase their savings. The savings rate, now at 6.9% of income, is reaching levels not seen since the early 1990’s. A declining personal savings rate from 1982-2007 was a very powerful tailwind to the above trend economic expansion that occurred during that period of time. It appears an elevated savings rate will likely remain for a prolonged length of time which is a positive for the overall health of the U.S. economy.
