This morning brought news that China will be injecting $600 billion into their economy to stimulate growth and hopefully avoid a severe slowdown there and abroad. This stimulus amounts to roughly 16% of the country’s output last year, according to today’s Wall Street Journal. While China’s growth is still expected to be strong relative to the negative results in the United States and the rest of the world, government experts there also believe 8% growth is the minimal level necessary to keep unemployment from spiking higher and the Communist Party from losing support. As one might expect, energy, materials and industrial stocks are responding nicely to this announcement today, given that these areas benefited the most from emerging market strength in recent years.
A great deal of focus is on unemployment right now and where it might peak. Most folks believe it will peak in the 8.5% range, still a considerable move up from the current rate in the mid 6 area. One of the few positives that we can take from this negative news is that the markets have usually started to do better even as the rate of unemployment increases. This is generally why the unemployment rate is viewed as a lagging indicator of economic and stock market activity. On a similar note, the following observations from Mike O’Rourke, Chief Market Strategist at BTIG Group, might be of interest.
“As we all know, it will likely be years before this recession is officially dated from peak to trough. On Friday, Stanford economist Robert Hall, head of the National Bureau of Economic Research’s Business Cycle Dating Committee, advised that his personal opinion is that the economic data is “conclusive” that the U.S. is in a recession. As recently as early July, the Committee had no plans to meet to declare when the last expansion peaked. Current Committee Member and NBER President Emeritus Martin Feldstein has asserted since early March that he believed the U.S. has been in recession since the end of 2007. Considering that Q4 2007 GDP was revised to a negative number in July and that the U.S. economy has lost jobs in every month in 2008, we believe that Q4 2007 will soon be designated as the peak of the previous expansion. According to Hall’s statements, the Committee is still waiting for additional GDP data before officially designating the month of the peak.
It’s worth noting that in three of the last four recessions (1981-82 was the exception), the announcement of the previous expansion’s peak occurred within a month of the recession trough. In the 13 recessions dating back to 1929, the median S&P 500 bottom occurred 58% of the way through the recession. The average return from the recession’s closing low to the end of the recession was 20.3%, the average return for the year following the recession was 15.9%. In only three of the 13 recessions was the S&P 500 lower a year after the recession – 2001, 1945 and 1937-38. Because this is not your garden-variety recession, investors should interpret the data conservatively. The three S&P 500 bottoms that occurred furthest into their recessions was at 77% of the way through – 1981-82, 1937-38 and 1929-33. For these three recessions, the average return from the recession low to the end of the recession was 25.8%, and the average return in the year following the end of the recession was 31.9%. The year following the 1937-38 recession was a negative 6% return, the average was offset by the 81.5% gain the S&P had from March 1933 to March 1934.
As noted earlier, we think the recession started a year ago. For the 13 recessions since 1929, 10 months is the median duration, it is likely that has already been exceeded. The longest of these recessions was 1929-1933 at 44 months. Second place is a tie between 1973-75 and 1981-82 at 16 months each. The key to remember is that Equities will bottom before the economy does. The U.S. economy is likely still on pace for the second worst recession since 1929-33 even if the recent Equity market lows hold.”
I sure hope history rhymes.