Double-dip Recession? Market Corrections Aren't Unusual

Traders_NYSEAfter yesterday’s stock market plunge of 513, or 4.31 percent, for the Dow, and in the aftermath of the painful debate over our nation’s debt ceiling, it’s no wonder the phones of financial advisors and asset management firms have been ringing off the hook today. Investors want some reassurance. And in light of other economic data showing a weak U.S. recovery and the continuing crisis in Europe, now we have to deal with economic and political pundits making judgments on the probability of slipping into another recession. Where do they come up with these percentages anyway?

Economist Nouriel Roubini from my alma mater NYU says our chances are greater than 50 percent that a recession is upon us in the next year. A few days ago Harvard University Economics Professor Martin Feldstein put the 50 percent figure out there. S&P’s Investment Policy Committee puts the risk of recession at 35 percent.

But many say this is not the time to panic. (Personally, I think the scariest thing has been the looks on the faces of the traders yesterday on the floor of the New York Stock Exchange.) Even S&P’s Sam Stovall, chief investment strategist, said he doubts the market top at the end of April could be signaling a fourth quarter start to a recession. In fact, he says such market corrections do not always lead to a recession:

By my count, this is the 19th correction since WWII. So far, the S&P 500 has fallen 12%, versus an average of nearly 14% for all corrections… In other words, is the dramatic decline in stock markets a harbinger of an impending recession here in the States that eventually drags the rest of the world with it? Stock market price declines of 10% or more aren’t reason enough to signal an impending recession, as there have been three times as many of these as there have been recessions since WWII.

Jason Thomas, chief investment officer of California-based RIA Aspiriant, echoes Stovall’s sentiments about market corrections:

Equity market corrections of 10% or more are not unusual. During the longest US equity bull market in history (the 12 years from December 1987 through March 2000), there were six corrections, concentrated at the beginning (troughs in January 1990 and October 1990) and at the end (October 1997, August 1998, October 1998 and October 1999). But the market has a short memory and each time feels different.

What does he recommend for clients’ portfolios?

In this kind of market environment, dramatic shifts in allocations would entail even more risk than maintaining a disciplined focus on your long-term strategy. Hedging is too costly to implement across individual portfolios, but on a tactical basis, the investment managers we have hired on your behalf continue to pursue their strategies and we will be harvesting tax losses and rebalancing as those opportunities arise.

Even PIMCO’s CEO and co-CIO Mohamed El-Erian points to the upside of the recent events:

We should not underestimate the markets' ability to recover if, for once, policymakers were to surprise on the upside. After all, there is lots of cash on the sidelines and most large companies (particularly multinationals) have impressive rock-solid balance sheets.

Leon LaBrecque, managing partner and founder of independent wealth management firm LJPR, says this is an opportunity for investors.

Look at it this way: a month and a half ago, we were facing a government shutdown, which was averted. Oil was higher, interest rates were higher, the deficit was higher, and the exact same other problems were in front of us. Today, deficit is lower, debt ceiling is extended, dollars is stronger, oil is cheaper and stocks are cheaper.

I think we should take the probability numbers (and the looks on traders faces) with a grain of salt and try to look for some of the opportunities in this market. Afterall, the Dow did finish back up 60.93 points today. But maybe that’s just the optimist in me talking.

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