There will be plenty of variations that assume that past performance is indicative of future results. Such an assumption is a prescription for investment pain.

First, there are not enough data points about recessions between the end of WWII and now to have any statistical meaning. I count 11 recessions since WWII. In what other human endeavor would we use just 11 data points and then decide to bet our hard-earned money? While average data can have meaning and give some grounds for comparison, it should be treated with heavy levels of skepticism when used as an argument for investing with conviction.

Here’s what we do know. Each and every recession is different from all the others for different reasons. The '70s and '80s were subject to serious levels of inflation. The recession at the beginning of this decade saw fears of deflation. Some happen with a stronger dollar and some with a weaker dollar.

The current recession is the result of serious bubbles in the housing and credit markets imploding. It’s not the result of excess inventory or overinvestment in manufacturing capacity. These excesses took years to build up and will take at least 2.5-3 years to correct. We are 15 months into the correction process. That is unlike any other recession we have experienced.

One more point: since we don’t know how long this recession will last, or what the results will be from further stimulus packages and hidden surprises, it’s a mug's game to try and pick a bottom in the stock market based on some theoretical halfway point of this recession. You are going to hear over and over that markets anticipate the recovery about 6 months in advance. Given that this may be a very long and slow recovery, be very cautious when you hear some bullish commentator using that "anticipation" rhetoric.

Back to 1982

The Institute for Supply Management released their October survey this week, and it was a shocker, helping to send the Dow down by 10% in two days. It showed much more weakness than expected. This survey is collected from a large number of manufacturing firms. The ISM then makes an index of the data. For instance, if 60% of the reporting companies see new orders rising, then that would yield an index number of 60 for new orders.

Anything below 50 shows negative growth. Below 40 shows a serious recession.
The overall manufacturing number came in at a very weak 38.9. We are now down to levels not seen since September 1982 (Chart courtesy of Paul Kasriel and Northern Trust).

The internal data was even worse. New orders fells to 32, suggesting further weakness in the manufacturing world. Backlog of orders was 29. New export orders, a source of growth in recent months, fell from 52 to 41, a rather large drop for a single month. This shows the rest of the world is beginning to slow down as well. Boding poorly for employment, only 43% of companies reported that they were planning to add additional employees.


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