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Lessons From Recessions Past

June 05, 1995|TOM PETRUNO

Traditionally, the onslaught of recession triggers one basic response on Wall Street: sell. The stock market's performance in some previous recessions:

* 1990: The Federal Reserve Board's interest-rate hikes of 1988 and 1989, intended to slow economic growth and inflation, began to have their desired effects by mid-1989. Stocks, meanwhile, continued to rise into 1990, betting on the proverbial soft landing.

But still burdened by the heavy debt levels of the 1980s, the weakening economy was vulnerable to any unexpected shock. It got just that with Iraq's invasion of Kuwait in August, 1990. Anticipating recession and war, the Dow Jones industrial average sank from its summer peak of 2,999.75 to 2,365.10 by October, a 21% loss.

* 1982: After hovering around 1,000 in early 1981, the Dow began to succumb to the realization that the Fed was dead serious about maintaining outrageously high interest rates to break inflation's back--regardless of the near-term impact on the economy.

As business activity spiraled downward in late 1981 and early 1982, the Dow crashed from its 1981 peak of 1,024.05 to 776.92 by Aug. 12, 1982, a decline of 24%.

* 1974: The Arab oil embargo of 1973, which more than tripled the price of crude, set the stage for the worst global economic slump since the Great Depression. The stock market got the message quite early: The Dow peaked at 1,051.70 in January, 1973, then began a two-year decline that took it down a stunning 45% to its nadir of 577.60 in December, 1974.

* 1970: Like so many others, the 1970 recession was largely a Fed production, as the central bank raised short-term interest rates to try to blunt rising Vietnam Era inflation.

And once again, the stock market began to tumble well before the recession officially began in late 1969. The Dow reached its zenith of 985.21 in December, 1968, then lost 36% before bottoming at 631.16 in May, 1970.

What's important to remember about all of these economic slumps (and resulting bear markets) is that each one constituted a genuine recession--meaning the economy had contracted for at least two consecutive quarters.

There have been many other instances in which the economy contracted for one quarter, or grew very slowly for a quarter or two, before resuming a healthier pace. Generally, those temporary slowdowns have not been accompanied by bear markets, defined as a decline of 20% or more in the Dow.

Investors still betting that the economy can officially avoid recession this time around have good reason to stay bullish on stocks.

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