Recessions and Recovery: The Marketing War Has Begun

As with all market downturns, there inevitably comes a time when the following numbers are rolled out and sent to investors. Often, we view the appearance of these tables as directly correlated with increasing investor confidence. Today there is a lot of news about credit markets thawing and other potentially market boosting discussions including Bernanke proposing that an additional stimulus plan may be necessary. Not to mention, I received no fewer than three versions of the following table yesterday in the general mail.

The table shows what an investor can expect in terms of mean and median returns over the 4 quarters following a “typical” recession. These numbers, compiled by Ned Davis Research, are very important when trying to identify reasons to get back into the market. It drives the fear of missing out or missing the comeback, but it assumes something that can only be known in hindsight. It assumes that we know the “Low Date in Recession” or when the bottom hit. These numbers won’t look nearly as good if you include the 4 weeks prior to the low date in the analysis, so you have to really be careful when you look at any statistical analysis like this one.

Returns Following Recession Bottoms

Recession Table

As the table demonstrates, however, there are significant reasons to desire moving into stocks as the market really starts to take off again. We don’t refute that logic, we just think that with every table distributed like this, investors need to have a straightforward plan and know why and what they are buying. Just handing over more funds to a mutual fund or investment manager does not guarantee any results. Instead, we believe (as many others do) that the math now supports the perspective that we are closer to a bottom than a top. As such, it is time to perhaps buy a few stocks that are selected for their valuation metrics and their prospects of growth. In other words, pick a few names and begin to nibble back into the market. While you may never catch the complete bottom (or top) in a market’s move, you can effectively buy and sell around them to end up with a respectable and reasonable average.

At Ockham, we have been positive on stocks for a couple of weeks now, and generally we view the market as overreacting to news whether good or bad. The standard deviations on broad market moves is staggering at this point for the last quarter, and we don’t envision that subsiding any time soon. However, for the investor who can stomach it, we do think that the Healthcare, Technology, and Energy sectors have some great values at this point.

Again, caution is warranted whenever you see tables showing numbers like mean returns of +32% following a recessionary bottom. But we again would offer that these tables even appearing are an indicator of the market’s desire to move investors back in. And when the doom and gloom contingent is finally starting to break down and not get as much airtime as the “don’t miss the rally” crowd, we view that as a potential sentiment catalyst.

Photo: Ned Davis Research

About Ockham Research 645 Articles

Ockham Research is an independent equity research provider based in Atlanta, Georgia. Security analysis at Ockham Research is based upon the principle known as Ockham's Razor, named for the 14th- century Franciscan friar, William of Ockham. The principle states that a useful theory should utilize as few elements as possible, because efficiency is valuable. In this spirit, our goal is to make the investing environment as simple and understandable as possible, yet no simpler than is necessary.

We utilize this straightforward approach to value over 5500 securities, with key emphasis given to the study of individual securities' price-to-sales, price-to-cash earnings and other historical valuation ranges. Our long term value investing methodology is powered by the teachings of Ben Graham and it has proven to be very adept at identifying stock prices that are out of line with fundamental factors.

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