Three possible futures for the economy in this recession and the consequences for investors.

Three futures…
This article sees three possible futures for the economy in this recession, and discusses the consequences for investors….

Three futures

Posted on March 12, 2009 by Richard Beddard
Filed Under Investing, Markets |


Two out of three ‘aint bad

From the desk of James Montier:

In a research note earlier this month, Mr Montier postulates three futures:

1. The optimistic path, in which government stimuli create inflation,
2. A Japanese style protracted work out with low growth and low inflation, and a…
3. Great Depression modelled on the 1930’s.

He concludes:

In the first two outcomes, value should do well. In the third, holding any equity is likely to be a poor decision. Since I don’t know which of these paths is more likely, I continue to believe that a slow steady deployment of capital into deep value opportunities in the face of market weakness is the most sensible option.

How value investing, buying shares in companies on low price to book (net asset value) ratios, would have worked in Japan:

Investors who bought and held would have earned a 3% annual return versus a market return of -4%. Investors who sold the most expensive stocks short, would have earned a return of 12%.

But in the Great Depression, cheap stops and expensive stocks both lost badly and buying shares was, quite simply, a bad idea.

The difference was the severity of the economic crises. In Japan, growth has been flat. In the 1930’s in the US, industrial production declined by 50% peak to trough.

His strategy, to buy value stocks gradually:

…Represents a regret minimisation approach - I end up with some exposure, and I’m dollar cost averaging down if this turns out to be the Great Depression 2. Alternatively, if the stimulus works, or the US follows the Japanese example, then as Jeremy Grantham says, “If stocks look attractive and you don’t buy them and they run away, you don’t just look like an idiot, you are an idiot.”

Category: Investing, Markets

http://blog.iii.co.uk/three-futures/

Interesting chart showing the Index relative to Normal P/E Range

Here is the chart showing the historical P/E range. The recent earnings crash looks scary, but the range display should return to normal in a few weeks.




......concerned about the consistent overvalue condition that has been the norm since the early 1990s, but it has persisted through two bull markets and two bear markets, demonstrating that investors just don't care about value. And the value range analysis we do, while an interesting curiosity, is not of much use for decision-making in the current environment. Follow the trend.

Full report:  (very technical)
http://www.decisionpoint.com/ChartSpotliteFiles/100312_cspot.html
http://www.decisionpoint.com/TAC/SWENLIN.html

Stocks Perform Well After A Recession

If the recession has already ended as evidence suggests, then the next six to twelve months may offer an opportunity for investors.

Stocks were higher both six and twelve months after the end of nine out of the ten recessions („49, „54, „58, „61, „70, „75, „80, „82, „91, „01). The exception was 2001. However, the slope of the S&P 500‟s 200-day moving average never turned positive in 2001, which is not the case in 2009. Commodities historically have performed well following recessions.

http://ciovaccocapital.com/CCM%20ASD%20AUG%202009%20PDF.pdf

World Stock Markets, Now vs Then

World Stock Markets, Now vs Then

Source: Global Financial Database.

(The above graph tracks behaviour after the peaks in world industrial production, which occurred in June 1929 and April 2008.)

While the fall in US stock market has tracked 1929, global stock markets are falling even faster now than in the Great Depression (Figure). Again this is contrary to the impression left by those who, basing their comparison on the US market alone, suggest that the current crash is no more serious than that of 1929-30.

Also read:

Market Performance Around Recessions

World industrial production, trade and stock markets are diving faster now than during 1929-30.

Market Performance Around Recessions

Market Performance Around Recessions

Some define recession as two successive quarters of negative real economic growth. Others use a more general framework of a decline in economic activity lasting for more than a few months with visible declines in GDP, employment, production and income.

The average length of recessions for the past 50 years has been 11 months. So as an investor, you can’t confirm if we’re in a recession until we’re almost halfway through it. For those deciding whether they should hold on or sell their holdings… take a look at the performance of the S&P from past recessions.

By looking at the numbers for the last nine recessions, we see some surprising and encouraging figures.

1. The largest market losses, as you would expect, are in the beginning of any recession.
2. The largest gains come from staying invested through the entire period.
3. The numbers show market timing would have given you an 8% gain at best and a -3% loss at worst.
   

For the last 50 years, the average return for the S&P 500 has been around 12.5%. Investors focused on the long term, who didn’t panic and who stayed fully invested in the market, found themselves with an average return of 42.4%. With those returns, it’s understandable why a great investor like Warren Buffett likes to see the market shake out from time to time. Here’s a look at one of Buffett’s most recent buys… and how to profit by following in his tracks.



More on this topic
(What's this?)
World Economy Falling Faster Than in 1929-1930 (naked capitalism, 4/6/09)
How Buffett Has Failed the True Test of Leadership (The Enlightened American, 1/27/09)
Buffett Bargain Hunting Despite 2008 Losses (Money Morning, 2/12/09)

Read more on Warren Buffett, U.S. Economic Cycles at Wikinvest

http://www.investmentu.com/IUEL/2008/May/warren-buffett-investing.html