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Wondering whether you should be invested in the stock market at all? You're not alone. It's a question many people are asking themselves. In fact, even money managers are having a hard time mustering up much enthusiasm these days -- I know of several who manage billions in assets who made just one or two trades in the last two weeks.

It's hard to focus on anything other than families who are suffering, the threat of war and the severity of the recession. It now appears to be a foregone conclusion that we are in recession. The only debate left seems to be when it started and how long and deep it will be.

It's important to remember that a recession is often one of the best times to buy stocks. According to a recent Leuthold Group study, the stock market typically peaks six to 12 months before a recession begins, and then bottoms out about midway through. If you consider the most recent peak of the market to be May 22, when the

S&P 500

hit 1309, then the expectation was that a recession could have begun in the fourth quarter. But the Sept. 11 attack on the World Trade Center accelerated that assumption at least one quarter ahead. I think it's safe to assume that the recession began in the third quarter of this year, and probably will last sometime into 2002.

That suggests more risk to earnings estimates and more downside to the market. But it also means it's a good time to prepare for what comes out on the other side. Normally, value stocks outperform the market overall coming out of a recession. These are typically the groups that are most economically sensitive and therefore are hit the hardest in a downturn. Because they get so cheap, they tend to have tremendous gains when the market turns around.

Large-Cap Growth Vs. Large-Cap Value
Value typically outperforms coming out of a recession

Source: The Leuthold Group 2001

So it's no surprise to see that in the Leuthold study of the last seven recessions, consumer discretionary stocks tend to snap back the fastest and greatest. Indeed, more than 35% of the stocks leading the market out of the business cycle trough were in a category that included retailers, autos, housing, and leisure and entertainment stocks.

I'm not so sure you can draw that same conclusion this time around. Consumer cyclicals such as autos and housing were some of the market's better performers before Sept. 11, shrugging off ominous signs that spending was likely to slow. Since the terrorist attack, we've seen further confirmation that the consumer sector is rolling over -- like the latest Conference Board reading of consumer confidence, most of which was gathered before disaster struck. To me, it seems unavoidable that the measures affecting consumer spending are only going to get worse. I don't think all that potential bad news is fully reflected in auto, retailing and housing stocks.

But that doesn't mean the whole sector should be avoided. The selloff in the last two weeks has been especially merciless to travel-related names. They are now among the year's worst performers. Many are down between 30% and 50%, to prices not seen in years.

Hotels, casinos, gaming, airlines and even stocks such as


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American Express

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have been bloodied. So that's where I'd start doing some work. Take the hotels, for instance.




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are all selling at price-to-earnings ratios of roughly eight times forward earnings. At that level, I can't imagine they're not factoring in a lot of bad news already.

Odette Galli writes daily for In keeping with TSC's editorial policy, she doesn't own or short individual stocks, although she owns stock in She also doesn't invest in hedge funds or other private investment partnerships. She invites you to send your feedback to

Odette Galli.