Another saying that Wall Street loves is that stock prices often go up over the course of a recession. This, to my surprise, turned out to be mostly true. Again, three out of four times, stock prices rose. The 1980 recession showed stock gains of 14% from start to finish, the '81-'82 downturn had a stock increase of 6.1%; the 1990 recession showed market gains of 5.35 from the start to the end. Again, only the 2001 recession bucked the trend with losses of 9.8%.
Recession Trading
But -- and on Wall Street, there is always a but -- a closer look at each recession showed that perhaps the actual picture was not always that rosy. In the 1980 recession, from the market high of the first month to the bottom of the downturn was nearly 20%. The low of the market took three months to occur before prices began to recover. Prices reached the opening price of the starting month right away and closed at or above that level every month of the recession. All in all, the market reaction to a weak economy was fairly mild.
In the 1981 recession, the high to low drop was right at 23%. It took 14 months for prices to recover to the first-month market high. In addition, it took 11 months for prices to recover to the opening price of the official start of the recession.
The 1990 recession had a 21% high to low drop. Prices reached the opening-month high the second month and surpassed it. After that, however, the market fell for the next three months, and it took eight more months to get back to the first-month highs. In addition, after the first-month rally, and the subsequent fall, it took nine months to get back to opening levels.
Market Commentary Two Reasons for Some Optimism on Housing 3/26/2008 9:18 AM EDT You couldn't tell it by today's newspapers, but it's not all gloom and doom out there.
Market Commentary We're Not Out of the Woods Yet 3/25/2008 12:57 PM EDT Some people are cheering that the worst is over, but we still have some market pain ahead of us.
At the time of publication, Melvin had no positions in the stocks mentioned, although positions may change at any time.Tim Melvin is a writer from Stevensville, Maryland, who spent 20 years a stockbroker, the last 15 as a Vice President of Investments with a regional firm in the Mid Atlantic area. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Melvin appreciates your feedback; click here to send him an email.
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