Thursday, February 21, 2008

If History Repeats…

There is a certain point of view expressed by more than a few economists and strategists equating the current so-called consumer-led recession with the last actual consumer-led recession of 1990. If that is the case, then a little factual information might help.

The table* above lists the salient data for the period immediately before, during, and after the 1990 recession. For comparative purposes, I have added the same data for the current period leading up to the market top last October.

In the early 90’s, the actual consumer-led recession resulted in operating earnings declining 20.6%, the 10 year Treasury began its multi year slide (eventually to 5.4% in Sept. 1993), and P/Es expanded as the equity market experienced its “bear” market in short order. How short?

The chart* above shows the extent of the “bear” market in 1990 – a touch over 20% in all of three months. The chart also shows how the “bear” market of 1990 did not test its lows once it got going to the upside climbing a wall of worry in the process.

Investment Strategy Implications

Going into the current “bear” market, P/Es and rates were hardly at inflated levels last fall. This fact is even more the case now that stocks have declined by a double-digit amount.

What this brief tour of the facts suggests is that investors must believe that the current “bear” market and consumer-led “recession” has more pain in store than the earnings and the market experience of the early 90’s. If not, then history may repeat itself by producing a painful yet brief “bear” market - if it hasn’t already.

*click on images to enlarge.

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