Tuesday, March 03, 2009

Worst GDP Quarters

the stock market is taking it on the chin yet again, with the major averages taking out their November 20, 2008 lows. The Dow is now below the “psychologically important” 7,000 level, which is unleashing many headlines noting that it’s been cut in half since its high.

Since last fall, when there was a lot of hope expressed that the November lows would hold, we’ve reminded investors that market bottoms are processes over time, not moments in time. We still think this process will be less V-bottom like and probably more like what we experienced as the last bear market was ending. Recall the market sold off into the July 2002 lows, then rallied; then sold off again into the ultimate October 2002 lows, then rallied; and then again sold off into the pre-Iraq war lows of March 2003. It was only then that the market found its footing.

The pressure on the market currently feels a lot like 2002-2003, when every speckle of hope was dashed and the cycle of negativity continued. Many technical analysts kissed hope good-bye when the Dow broke 7,200 and the S&P 500 broke 740. Fundamental analysis isn’t helping either, of course, as the news is uncertain at best and dire at worst.

But history is full of examples of the stock market finding its footing while the economic news is most bleak. In fact, check out the table below, which ranks the worst 10 single quarters for GDP in history and shows how the stock market performed in the next year.

10 Worst GDP Quarters
Date (of Quarter) S&P 500 One Year Later
3/31/1958 32%
6/30/1980 15%
3/31/1982 37%
12/31/1953 45%
3/31/1949 15%
12/31/1960 23%
12/31/1981 15%
3/31/1975 24%
12/31/1970 11%
12/31/1957 38%
Average 25%

Source: Bureau of Economic Analysis, FactSet.

Note that in every case—even though GDP was at its crescendo low for the cycle—the stock market rebounded by double-digit percentages each time, with an average gain of 25%. What we don’t know, of course, is whether the fourth quarter’s -6.2% GDP will be the ultimate low for the economy, but history provides some reminders about the discounting nature of the stock market.

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