Market Rally Signals Stocks Looking Past Recession

The April rally in stocks is suggesting that Wall Street may be looking past recession, if indeed the US economy is even in one.

“What the market is saying is so far it doesn't look like a disaster, so we're going to gain back some of what we lost in the first quarter,” says veteran money manager James Awad, who’s currently chairman at WP Stewart Asset Management. “I see this as a wait-and-see period.”

One big question for investors is whether the market’s decline in recent months was more a reaction to the ongoing credit crunch or anticipation of a more conventional economic recession, which lends itself to greater historical comparison.

“We're of the opinion that the market has likely seen the worst,” says Standard & Poor’s Chief Investment Strategist Sam Stovall, who studied market behavior in and around the 11 recessions since 1945. On average, the S&P 500 declined a combined 25.9 percent ahead of and during the recession.

Data compiled by S&P shows stocks typically fall from their highs nine and a half months before the onset of a recession and bottom out three–fifths of the way into the downturn, but Stovall sees “eerie similarities” between today and the 1990-1991 recession, which did not follow that script.

Back then, the market peaked in July, the same month—history would later show—the eight-month recession began. The market fell almost 20 percent in three months (rather than the usual 12-14-month period), and then staged an impressive rebound in October.

This time around, the market peaked in October and fell 18.6 percent during a three-month period, while the recession—if one is underway—is commonly thought to have begun in December (maybe January) and is likely to end in July, according to S&P's and a growing number of forecasts.

There are also similarities between the extent of the market’s decline and significant Fed interest rate cuts.

Fed policy action has done a lot to calm investors about the credit crunch and may even have softened the front end of the recession, which may help explain why recent economic data has provided weak fodder for the recession argument.

“The credit system is working—slowly, but working—so that crisis seems to be over,” says Awad. “On the economy, if it's ever going to get worse, then consensus is it should be this quarter.”

Positive first-quarter GDP, a slight decline in the March jobless rate and generally modest job losses in recent months have given some economists pause. READ MORE