As U.S. stocks have continued to rise from their March 9, 2009 bottom, a development that typically precedes the end of a recession by 3-6 months, speculation concerning how high stocks might rise by year-end has abounded. Historical evidence from the six most recent recessions suggests that the upside potential could be limited relative to the 982.18 figure at which the S&P 500 closed on Monday.
The following are implied closing figures based on the past six recessions, using the S&P 500’s March 9 closing price of 676.53 as the bottom.
1960-61 Recession: 932.24
1969-70 Recession: 974.23
1980 Recession: 988.95
1981-82 Recession: 1,121.34
1990-91 Recession: 920.41
2001 Recession: 907.94
Mean: 984.69
Median: 972.59
Ultimately, how key factors play out will determine the magnitude and duration of the current recession and its impact on corporate profits in 2009. Some of those factors include:
• The continuing evolution of the economic challenges, likely impacting commercial real estate and consumer credit.
• Long-term deleveraging that reduces the role of the consumer in the overall economy. Currently, real personal consumption expenditures account for just over 70% of GDP. That figure could slowly decline below 70% of GDP in succeeding quarters.
• Impact of rapidly rising U.S. debt levels. If foreign capital inflows slow or even reverse, a currency crisis could unfold.
• Possible geopolitical shocks that could complicate or exacerbate the nation's challenges.
For now, with the economy showing signs of stabilizing, the historic experience suggests that the S&P 500 could end 2009 within 100 points of 1,000 should the recession end in the third or fourth quarter of this year. Such a close would indicate that the sharpest gains in equities prices have already occurred.
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Showing posts with label stocks. Show all posts
Showing posts with label stocks. Show all posts
Tuesday, July 28, 2009
Friday, July 10, 2009
Is the U.S. in the Midst of a “Lost Decade” for Stocks?
Typically, U.S. stocks bottom out 3-6 months before the end of a recession and they return to their pre-recession highs, on average, about 3.7 years after having reached that high. The experience following U.S. recessions since 1950 is as follows:
• July 1953-May 1954 recession: Pre-recession peak: 293.79, January 5, 1953; First close at or above that level: 294.03, February 4, 1954; Interval: 1 year, 30 days (395 days).
• August 1957-April 1958 recession: Pre-recession peak: 521.05, April 6, 1956; First close at or above that level: 523.40, September 15, 1958; Interval: 2 years, 5 months, 9 days (892 days).
• April 1960-February 1961 recession: Pre-recession peak: 685.47, January 5, 1960; First close at or above that level: 692.06, April 10, 1961; Interval: 1 year, 3 months, 5 days (461 days).
• December 1969-January 1970 recession: Pre-recession peak: 985.21, December 3, 1968; First close at or above that level: 988.26, November 9, 1972; Interval: 3 years, 11 months, 6 days (1,437 days).
• November 1973-March 1975 recession: Pre-recession peak: 1,051.70, January 11, 1973; First close at or above that level: 1,065.49, November 3, 1982; Interval: 9 years, 9 months, 23 days (3,583 days); Two oil price shocks, an extended period of high inflation, and two recessions (January-July 1980 and July 1981-November 1982) occurred during that nearly 10-year interval.
• July 1990-November 1991 recession: Pre-recession peak: 2,999.75, July 17, 1990; First close at or above that level: 3,004.46, April 17, 1991; Interval: 9 months (274 days).
• March 2001-November 2001 recession: Pre-recession peak: 11,722.98, January 14, 2000; First close at or above that level: 11,727.34, October 3, 2006; Interval: 6 years, 8 months, 19 days (2,454 days); The dot-com bubble burst, the federal government saw budget surpluses that emerged during the late 1990s give way to renewed significant budget deficits, and the September 11, 2001 terrorist attacks occurred during that nearly 7-year interval.
However, in the earlier experience, there have been two occasions during which the Dow Jones Industrials failed to reach its pre-recession peak for 10 years or longer. Those seminal economic events were the Panic of 1907 that produced a credit crunch and severe recession in which real GDP fell 10.8% and the Great Depression during which real GDP contracted by 26.5% in the 1929-33 timeframe. In addition, following the collapse of Japan’s twin stock market and real estate bubbles, its Nikkei 225 Index has remained much below its December 1989 top for more than 19 years.
The Panic of 1907: The Dow Jones Industrials closed at 103.00 on January 19, 1906. The Dow Jones Industrials did not return to that level until it closed at 103.11 on September 28, 1916, an interval of 10 years, 8 months, and 9 days (3,905 days).
The Great Depression: The Dow Jones Industrials closed at 381.17 on September 3, 1929. The Dow Jones Industrials did not return to that level until it closed at 382.74 on November 23, 1954, an interval of 25 years, 2 months, and 2 days (9,212 days).
Japan’s “Lost Decade” of the 1990s-2000s: The Nikkei 225 Index closed at 38,915.87 on December 29, 1989. Through July 10, 2009, the Nikkei has failed to return to that level. That is an interval of 19 years, 6 months, and 11 days (7,133 days). Its last closing price was 9,287.28 on July 10, a figure that is 76% below its December 1989 crest.
In terms of the ongoing “Great Recession” in the United States, the Dow Jones Industrials peaked at 14,164.53 on October 9, 2007. On July 9, the Dow Jones Industrials closed at 8,183.17, which is 42% below its pre-recession peak.
Four possible scenarios could result in the Dow Jones Industrials taking a decade or longer to return to its pre-recession peak:
• In the absence of visible signs of economic recovery, federal policy failures, and a generally unrelenting bear market that turns aside repeated rally attempts, investors could make fundamental changes in their perceptions of risk concerning equities. That development would lead to a long-term reduction in demand for stocks.
• The economic recovery from the current severe recession would be fairly brief. Perhaps, a double-dip recession scenario would unfold. At the same time, on account of a fragile financial system that takes time to heal and increased leverage that needs to be worked off by households, recessions could grow more frequent in succeeding years. During the pre-World War II era (1857 through 1945), the median duration of economic expansions was 22 months and the mean length was 29 months. During the post-World War II period, those figures more than doubled to 45 and 58 months respectively. There is no assurance that the post-World War II experience of notably longer business expansions will persist.
• The U.S. could still experience a systemic financial crisis that severely damages its financial institutions, the development and onset of deflation from a premature withdrawal of fiscal and monetary stimulus, or a currency crisis should it encounter difficulty raising funds to support its economic stimulus efforts and underwrite possible new programs.
• A major geopolitical shock or shocks that have a substantial adverse impact on the U.S. and international economies. Such shocks could include, but would not be limited to the outbreak of conflict in a geopolitically crucial part of the world, the collapse of a government and radical changes in policy in a nation whose economy is intensely interconnected with the world’s major economies, a catastrophic natural disaster that devastates a globally-important financial center.
Conclusion:
Given the past experience following the severe 1973-75 recession, the collapse of the dot-com bubble, there is a reasonably likely prospect that the Dow Jones Industrials may not return to its pre-recession high of 14,164.53 until late in 2014 or beyond. The effectiveness of ongoing political efforts to shore up the nation's banking system and revive the economy and whether or not there are additional significant economic and geopolitical shocks will be critical in influencing the timing of a stock market recovery. Should those efforts fail to produce the desired impact, or worse, should they result in consequences that adversely impact or disrupt the nation’s growth trajectory, there is a genuine possibility that the Dow might not return to that level for a decade or longer after its October 9, 2007 record close.
&&
• July 1953-May 1954 recession: Pre-recession peak: 293.79, January 5, 1953; First close at or above that level: 294.03, February 4, 1954; Interval: 1 year, 30 days (395 days).
• August 1957-April 1958 recession: Pre-recession peak: 521.05, April 6, 1956; First close at or above that level: 523.40, September 15, 1958; Interval: 2 years, 5 months, 9 days (892 days).
• April 1960-February 1961 recession: Pre-recession peak: 685.47, January 5, 1960; First close at or above that level: 692.06, April 10, 1961; Interval: 1 year, 3 months, 5 days (461 days).
• December 1969-January 1970 recession: Pre-recession peak: 985.21, December 3, 1968; First close at or above that level: 988.26, November 9, 1972; Interval: 3 years, 11 months, 6 days (1,437 days).
• November 1973-March 1975 recession: Pre-recession peak: 1,051.70, January 11, 1973; First close at or above that level: 1,065.49, November 3, 1982; Interval: 9 years, 9 months, 23 days (3,583 days); Two oil price shocks, an extended period of high inflation, and two recessions (January-July 1980 and July 1981-November 1982) occurred during that nearly 10-year interval.
• July 1990-November 1991 recession: Pre-recession peak: 2,999.75, July 17, 1990; First close at or above that level: 3,004.46, April 17, 1991; Interval: 9 months (274 days).
• March 2001-November 2001 recession: Pre-recession peak: 11,722.98, January 14, 2000; First close at or above that level: 11,727.34, October 3, 2006; Interval: 6 years, 8 months, 19 days (2,454 days); The dot-com bubble burst, the federal government saw budget surpluses that emerged during the late 1990s give way to renewed significant budget deficits, and the September 11, 2001 terrorist attacks occurred during that nearly 7-year interval.
However, in the earlier experience, there have been two occasions during which the Dow Jones Industrials failed to reach its pre-recession peak for 10 years or longer. Those seminal economic events were the Panic of 1907 that produced a credit crunch and severe recession in which real GDP fell 10.8% and the Great Depression during which real GDP contracted by 26.5% in the 1929-33 timeframe. In addition, following the collapse of Japan’s twin stock market and real estate bubbles, its Nikkei 225 Index has remained much below its December 1989 top for more than 19 years.
The Panic of 1907: The Dow Jones Industrials closed at 103.00 on January 19, 1906. The Dow Jones Industrials did not return to that level until it closed at 103.11 on September 28, 1916, an interval of 10 years, 8 months, and 9 days (3,905 days).
The Great Depression: The Dow Jones Industrials closed at 381.17 on September 3, 1929. The Dow Jones Industrials did not return to that level until it closed at 382.74 on November 23, 1954, an interval of 25 years, 2 months, and 2 days (9,212 days).
Japan’s “Lost Decade” of the 1990s-2000s: The Nikkei 225 Index closed at 38,915.87 on December 29, 1989. Through July 10, 2009, the Nikkei has failed to return to that level. That is an interval of 19 years, 6 months, and 11 days (7,133 days). Its last closing price was 9,287.28 on July 10, a figure that is 76% below its December 1989 crest.
In terms of the ongoing “Great Recession” in the United States, the Dow Jones Industrials peaked at 14,164.53 on October 9, 2007. On July 9, the Dow Jones Industrials closed at 8,183.17, which is 42% below its pre-recession peak.
Four possible scenarios could result in the Dow Jones Industrials taking a decade or longer to return to its pre-recession peak:
• In the absence of visible signs of economic recovery, federal policy failures, and a generally unrelenting bear market that turns aside repeated rally attempts, investors could make fundamental changes in their perceptions of risk concerning equities. That development would lead to a long-term reduction in demand for stocks.
• The economic recovery from the current severe recession would be fairly brief. Perhaps, a double-dip recession scenario would unfold. At the same time, on account of a fragile financial system that takes time to heal and increased leverage that needs to be worked off by households, recessions could grow more frequent in succeeding years. During the pre-World War II era (1857 through 1945), the median duration of economic expansions was 22 months and the mean length was 29 months. During the post-World War II period, those figures more than doubled to 45 and 58 months respectively. There is no assurance that the post-World War II experience of notably longer business expansions will persist.
• The U.S. could still experience a systemic financial crisis that severely damages its financial institutions, the development and onset of deflation from a premature withdrawal of fiscal and monetary stimulus, or a currency crisis should it encounter difficulty raising funds to support its economic stimulus efforts and underwrite possible new programs.
• A major geopolitical shock or shocks that have a substantial adverse impact on the U.S. and international economies. Such shocks could include, but would not be limited to the outbreak of conflict in a geopolitically crucial part of the world, the collapse of a government and radical changes in policy in a nation whose economy is intensely interconnected with the world’s major economies, a catastrophic natural disaster that devastates a globally-important financial center.
Conclusion:
Given the past experience following the severe 1973-75 recession, the collapse of the dot-com bubble, there is a reasonably likely prospect that the Dow Jones Industrials may not return to its pre-recession high of 14,164.53 until late in 2014 or beyond. The effectiveness of ongoing political efforts to shore up the nation's banking system and revive the economy and whether or not there are additional significant economic and geopolitical shocks will be critical in influencing the timing of a stock market recovery. Should those efforts fail to produce the desired impact, or worse, should they result in consequences that adversely impact or disrupt the nation’s growth trajectory, there is a genuine possibility that the Dow might not return to that level for a decade or longer after its October 9, 2007 record close.
&&
Thursday, July 9, 2009
Euro-S&P 500 Relationship Is Weak
In making the case for a possible summertime S&P 500 rally to 1,000, an analyst cited a recently strong correlation between movements in the Euro and the S&P 500. CNBC reported:
The recent rally in the euro is a positive sign for the S&P 500, because it shows appetite for risk is still strong and the S&P could hit 1,000 this summer, Kevin Cook, market analyst at PEAK6 Investments, told CNBC Wednesday.
"The positive correlation here between the S&P 500 and the euro has been unbelievable in the past three quarters," Cook, who is also a technical analyst, told "Worldwide Exchange".
As is frequently the case in the realm of finance, seemingly strong relationships can be temporary in nature. In fact, that is the case between the Euro and the S&P 500. Over a longer period of time, the correlation all but completely disintegrates.
The relationship breaks down because the U.S. economy is not disproportionately dependent on U.S.-European Union trade. As a result, the apparently strong relationship between the U.S. Dollar-Euro foreign exchange and S&P 500 is not an enduring feature of the financial landscape.
The recent “unbelievable” correlation between the Euro and S&P 500 was likely produced by special but temporary circumstances. The rapid escalation and then gradual waning of the global financial crisis probably created the seemingly intense relationship between the Euro and the S&P 500.
During extreme market turbulence, many securities and financial instruments—even completely unrelated ones—often move in tandem during a massive flight to safety. Over the past 9 months, there was a full-fledged financial panic, followed by some return of an appetite for risk beginning in March 2009. At first, there was a massive rush out of stocks and into the U.S. dollar. Both the S&P 500 and Euro fell sharply. Once the panic abated and the appetite for risk began to return this spring, capital began flowing back into a broader range of securities and financial instruments. During that time, the S&P 500 and Euro rose in strong tandem, though not as closely as had been the case during the panic.
However, given the past data, over the passage of time, it would be more likely than not that the previously far weaker relationship would begin to reassert itself as the special circumstances behind the recent strong co-movements would no longer be relevant. Already, there are early hints that the relationship is now weakening. Although the r2 between the Euro and S&P 500 has averaged 0.732 over the past year (July 1, 2008-June 30, 2009), it has faded somewhat to 0.663 for the first six months of 2009 and to 0.509 since March 15.
Therefore, if one is looking for hints as to the possible direction of the S&P 500, one should look for developments beyond the Euro to support such a move. Over the longer haul, relying largely on the Euro could be potentially hazardous given the weak medium-term correlation.
&&
The recent rally in the euro is a positive sign for the S&P 500, because it shows appetite for risk is still strong and the S&P could hit 1,000 this summer, Kevin Cook, market analyst at PEAK6 Investments, told CNBC Wednesday.
"The positive correlation here between the S&P 500 and the euro has been unbelievable in the past three quarters," Cook, who is also a technical analyst, told "Worldwide Exchange".
As is frequently the case in the realm of finance, seemingly strong relationships can be temporary in nature. In fact, that is the case between the Euro and the S&P 500. Over a longer period of time, the correlation all but completely disintegrates.
The relationship breaks down because the U.S. economy is not disproportionately dependent on U.S.-European Union trade. As a result, the apparently strong relationship between the U.S. Dollar-Euro foreign exchange and S&P 500 is not an enduring feature of the financial landscape.
The recent “unbelievable” correlation between the Euro and S&P 500 was likely produced by special but temporary circumstances. The rapid escalation and then gradual waning of the global financial crisis probably created the seemingly intense relationship between the Euro and the S&P 500.
During extreme market turbulence, many securities and financial instruments—even completely unrelated ones—often move in tandem during a massive flight to safety. Over the past 9 months, there was a full-fledged financial panic, followed by some return of an appetite for risk beginning in March 2009. At first, there was a massive rush out of stocks and into the U.S. dollar. Both the S&P 500 and Euro fell sharply. Once the panic abated and the appetite for risk began to return this spring, capital began flowing back into a broader range of securities and financial instruments. During that time, the S&P 500 and Euro rose in strong tandem, though not as closely as had been the case during the panic.
However, given the past data, over the passage of time, it would be more likely than not that the previously far weaker relationship would begin to reassert itself as the special circumstances behind the recent strong co-movements would no longer be relevant. Already, there are early hints that the relationship is now weakening. Although the r2 between the Euro and S&P 500 has averaged 0.732 over the past year (July 1, 2008-June 30, 2009), it has faded somewhat to 0.663 for the first six months of 2009 and to 0.509 since March 15.
Therefore, if one is looking for hints as to the possible direction of the S&P 500, one should look for developments beyond the Euro to support such a move. Over the longer haul, relying largely on the Euro could be potentially hazardous given the weak medium-term correlation.
&&
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