Debunking a Few Stock Price Myths

The 2001 recession has been the granddaddy of the last four. The drop from the first-month high to its lows was 26%, and it took three years and four months to get back to those highs. The total drawdown before it returned to new highs was over almost 40%. Even though the actual recession ended in six months, prices dropped for much longer than that before bottoming. It also took three years and six months to return to the opening prices of the first month of the official recessionary period.

Where does this leave us right now? Even if we expect prices to be higher by the time this recession ends, the price action could be quite volatile and drop substantially before recovering. The average decline from high to low of a recession was 22.5%.

If we entered a recession in February of this year, as many think we may have, the high was 1396. This would give us a downside to about 1081.9 on the S&P 500. On average it takes about 10 months to recover to the old highs and about the same to recover to the opening price levels. That would take us out to November before it would be reasonable to anticipate a new bull market.

Wall Street adages are nice. Numbers are better. Without a substantial turnaround in the United States economy, a recession is, I think, pretty much inevitable. Once we enter one, it is reasonable based on historic stock market reactions to expect prices to have sharp moves down before recovering. This time may be different. But I do not think that would be the way to bet it.

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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.