MARKET LAB: GETTING BACK INTO THE MARKET

Recession halftime: A good point to march in

DAVID PARKINSON

March 7, 2009

People often question why economists persist in trying to pinpoint when a recession began, even months after the fact. One key reason, for financial markets especially, is that if you know when a recession started, you have a better idea when it might end.

As Scotia Capital market strategist Vincent Delisle recently noted, there's a big difference for the equity market whether a recession is near its start, or near its end. Looking at U.S. recessions of the past 50 years, the S&P/TSX composite index has declined an average of 11 per cent in the first half of recessions (i.e. the half-way point between the economic peak and the trough), but has gained an average of 10 per cent in the second half. The S&P 500 has averaged a 10-per-cent decline in the first half, but a 13-per-cent gain in the second half.

So, it raises the question: Have we reached halftime yet?

Recessions, carbon-dated

Indeed, a couple of key U.S. economic indicators in the past week hinted that the bottom may be nearing. Yesterday's employment numbers showed that for the second successive month, job losses declined slightly. Last Monday's Institute for Supply Management index of manufacturing activity rose for the second consecutive month.

Canada's recession, by comparison, is probably less than six months old, though it's not likely to be as long or as deep as the U.S. recession. And since the Canadian stock market is heavily tilted toward export-driven resource stocks, the U.S. economic cycle has always been a key indicator for Canadian stock performance.

Gold's glitter not over yet

Of course, the big question is whether we're in the midst of something more like a depression than a recession. The deep downturn that punctuated the Great Depression lasted 43 months, from August, 1929, to March, 1933.

However, if you accept the majority view on this downturn - i.e. longer/deeper than the garden-variety recession, but not a full-blown depression - then 15 months is probably no worse (and maybe better) than an approximate midpoint for the economic contraction. That should mean a nice bounce for stocks as the recession moves solidly into its second half.

Mr. Delisle's data show that gold stocks - which in this recession, like others, have been outperformers in the first half, thanks to gold's enduring safe-haven reputation - are also traditional leaders in the market recovery as the recession winds down. But once the economy turns the corner, golds become the market laggards, while more sectors highly sensitive to the economic cycle (consumer stocks, technology) take over leadership.

dparkinson@globeandmail.com