Dow Jones Industrial Average

This is a historical chart of the DJIA from 1960 to the present. The bars indicate recessionary periods. Here’s some observations that I thought would be of some interest.

1) The market generally doesn’t seem to anticipate a recession. In other words, the market goes down when the recession hits, rather than 6 months in advance. In some cases, the market didn’t react until after the recession hit.

2) The market tends to bottom out midway through the recession.

3) The market generally recovers by the time the recession ends. I think this is why some people say that the stock market rises during a recession. This is true in the sense that the market is generally higher at the end of the recession than it was at the beginning.

4) It seems possible to have a recession during a mid-term election cycle rally. Recessions historically have lasted between 6-18 months. If a recession started early in 2007, it would probably end by the middle of 2008. We would expect the stock market to recover by then. The mid-term election cycle started in October of 2006 and ends in October of 2008. Since the cycle would outlast the recession, its possible that the markets could still see a net gain over the 2 year span. In other words, the recession (predicted by the housing bust) and the stock market rally (predicted by the mid-term election cycle) could both turn out to be true.

Although not shown in this chart, I did see a case prior to 1960 where the US was in a recession and stocks continued to rise. This was in the mid/late 1920’s before the stock market collapse. So the market doesn’t always drop during a recession.