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Investing in the Time of Recession
Investing in the Time of Recession
Last Update: 08-Apr-08 11:46 ET
[BRIEFING.COM - Robert V. Green] Now that everyone has "decided" we are already in a recession (or will be soon), it is worth considering what it means to be "investing in the time of recession." Here are some thoughts.
The actual definition of a "recession," as used by economists -- and when investors talk about historical market trends -- is two sequential quarters of negative GDP growth.
A simple decline from strong GDP growth to lower, but still positive, GDP growth is not a recession. Slower growth may imply that a recession is coming, but, technically, a recession is not even possible until we have had at least one quarter with negative GDP growth. That has not happened yet, despite the fact that fourth quarter GDP in 2007 dropped to 0.6% from the third quarter's very strong 4.9%.
With forecasts for 08Q1 GDP at 1.0% and 08Q2 growth at 1.0% (Briefing.com estimates), a recession is not imminent. Slower growth, yes, but not a true recession that can be compared with historical recessions.
Nevertheless, the "technical" definition is clearly long out of fashion. The new fashion is to use the word "recession" to define an economy that is moving from strong growth to modest or slow growth.
This imprecise use of language tends to create confusion in the marketplace, as it feeds the fears of those with negative outlooks. At the same time, the lingual imprecision tends to make it very difficult to make positive impressions with contrary arguments (such as the one I am making now).
The Mass Media Is In A Depression
The general impression given by the mass media, however, is that the U.S. economy is not only now firmly in a recession, but that we have been in one for a long time.
This type of sentiment-based bias manifests itself in both the selection of news items to highlight and the tone of the presentation. Sometimes, however, the bias is so prominent as to be almost laughable. For example, the following statement was actually made when the fourth quarter GDP of 0.6 was officially announced: "In another sign that the U.S. is already in a recession, fourth quarter GDP was reported today to have dropped sharply to only 0.6%."
Ignoring the fact that the a recession cannot even be "predicted" until we have had a quarter with negative GDP growth, it is ludicrous to suggest that a positive GDP growth report is an indication that we are "now" in a recession.
A lot of this bias probably stems from the fact that the mass media world has been in a depression for more than 10 years, with the broadcast TV segment in an even deeper recession for 20 years.
Twenty years ago, television news was the primary source of information -- and free entertainment -- for U.S. citizens. TV anchors were superstars. Newspapers were a close and complimentary powerful force.
The rise of cable television in the late 1980s eroded the power of broadcast TV companies. The advent of the Internet in the late 1990s destroyed the power of both television and newspapers as the primary "arbiters" of information.
Together the two media forces of television and newspapers were often called "the fourth estate." You don't hear that term much anymore. They have simply lost market share to the Internet and other sources.
To work in such an industry must be extremely difficult, particularly for those who began their careers while the media was still "on top." Is it any wonder that many in the media focus primarily on negative news items about the economy?
Even with a weakened influence, however, the negative bias of the media has a meaningful influence over market sentiment.
Market Lowest When A Recession Is "Declared"
Since the market is an anticipatory pricing vehicle, whenever overall sentiment tilts strongly toward the view that we are now entering a recessionary period, the pricing discount demanded by the market is often extreme.
This is the explanation of the price declines since the beginning of 2008. While some pundits have argued that the political environment has been a factor, the more meaningful explanation is that overall sentiment -- whether correctly or not -- has shifted to anticipating a coming recession.
From a historical perspective, however, the market has almost always been lowest at this very point: when everyone finally capitulates and begins anticipating a coming recession.
As the economy actually enters the recessionary period, meaning that actual economic data showing negative GDP growth are reported, the market actually tends to rise. Investors start looking for those stocks which will be the leaders out of the recession during this time and begin placing anticipatory bets on the recovery.
This means that the when overall sentiment swings strongly to the "we are in a recession" viewpoint, it usually marks a buying opportunity.
The market is very likely at this point right now.
The Market's Predictive Ability
While the market functions as an anticipating pricing machine, it is not always a consistent predictive machine.
It is because of this history, that this old market adage is still useful:
The market has correctly predicted nine of the past five recessions.
Keep this in mind for the next couple of months.
Count On Inflation
Lastly, whether we are in a true recession or not, we have certainly entered a period of slower growth overall.
The usual pattern for times like these -- and particularly for true recessions -- is that the exit into strong growth periods is accompanied by a sharp increase in inflation.
With the current approach being taken by the Federal Reserve, this historical pattern is likely to be repeated.
Just another thing to keep in mind while investing "in the time of recession."
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