If This Is Now a Recession, How Long Before the Next Bull?
Letting history be your guide isn't simple, though
By many metrics, a recession means two successive quarters of negative growth. Since U.S. economic growth to the end of the second quarter fell at an annualized rate of -0.9%, technically, we have now seemed to have touched the watermark. What does this mean for stocks?
Firstly, we know when markets start turning positive: around four months before recessions end.
In addition, we know how long recessions go on — but this is where our data gets trickier.
On the one hand, the average recession in the U.S. lasted roughly 17 months. But: the shortest official recession in U.S history lasted just two months in early 2020. The longest official recession in U.S. history lasted more than five years and occurred from 1873 to 1879, according to the National Bureau of Economic Research.
However, with a more active Fed, recessions have been getting shorter on average. Most recessions after World War II averaged just under 10 months.
Timing implications
If we take July 1 as the start of the current recession, employing the 10-month average duration as our rule of thumb, it would continue until May 2023. Subtracting how the stock market tends to bottom four months before the recession ends, our best time to re-enter the market full-bore would be January 2023.
If however this was a historically super-short recession like Covid-19 we’d be around eight months too late. On the other hand, the inflation-killer recession of 1981-82 went on for 16 months — meaning, our timing would be pretty poor if we turned risk-on before June or July 2023.
My working plan
In the past, I have posted my assumption that this bear will have legs until around November, based on seasonality, long-term sentiment, and now in addition based on historical precedent.
Unless the Fed or the Federal government aim all their firepower at re-igniting the economy (as they did in 2020, to fight the effects of Covid-19), a recession has a quasi-natural lifespan. It just takes time to unwind and re-load an economy that is highly strung.
The Fed has clearly stated fighting inflation has priority over growth, so we won’t be seeing a repeat of 2020. Yet I reckon this won’t be 1981 V.2. again, either. Inflation nowadays is not systemic and deeply embedded into economic expectations, in contrast to the 1970s and early 1980s.
I’ll be keeping a close look at inflation data, inflation expectations, and on the calendar…
When do you plan to start investing in the stock market again? Let me know in the comments, please!
Exactly. "Buckle up, Buttercup".
Martin,
George Vrba weighed in on this today:
https://seekingalpha.com/article/4530385-an-upcoming-recession-is-signaled-by-the-forward-rate-ratio
His mathematical take is minimum of 39 weeks and average of 62 weeks after yield inversion to the start of recession. And he appears to be calculating the yield inversion from today (using a smoothing algo). That would put the average for a start of a recession between next April and next October.
And the article seems to assume (though it never says so) that we are NOT in recession today.
If that's the case, this would push the recession start date out by 39 to 62 week, plus your 17 months to get back in. :-)
Also interestingly, Verba includes a business cycle chart showing we are just on the cusp of the last BOOM in the current business cycle (and NOT in recession).