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Will stocks rebound?

- Alan Lavine and Gail Liberman

Could we be headed into another recession?

A recent Conference Board report indicated that its monthly consumer--confidence index fell 1.3 percent in September to 1.3 percent--its fourth straight decline.

Meanwhile the stock market is down about -20 percent this year. Current stock prices represent expectations about future corporate profits. So investors are saying they don't believe corporate earnings are growing. Plus they are nervous about risks due to terrorism.

Money has been going into cash, CDs and bonds that pay high yields compared with dismal stock market returns. Why lose money when you can get a guaranteed return of 3 percent from some bank money market deposit accounts?

Nevertheless, research by Gruntal, a New York-based brokerage firm, shows that the stock market typically performs well 12 months after a recession ends.

Over the past 13 recessions since 1926, stocks on average have grew 17.7 percent 12 months after the recession ended. But not all years were up years. The range was -11 percent to +81 percent. Stocks have lost money only three times in the year following a recession. Those years were 1927, 1938 and 1945.

"Recessions arrive in a variety of ways with varying contributing factors," says Joseph Battipaglia, Gruntal's chief investment officer. "Today's shallow recession defied expectations of something much deeper, given the tech wreck and uncertainty surround the war on terrorism. However, we expect both the stock and bond markets to respond well as we begin new cycle of growth.

Historically, stock returns have far outpaced those of bonds twelve months after a recession ended."

Well let's hope Battipaglia works with a good crystal ball.

You have to take a long-term perspective when you invest in stocks. Ibbotson Associates, Chicago, based on research conducted since 1926, says that the longer you own stocks, the less chance you have of losing money. For example, based on the performance of the S&P 500:

  • The average one-year return on stocks ranged from -43 percent to +54 percent.

  • The average five-year annual return can range from -13 percent to +29 percent.

  • The average 10-year annual return can range from -1 percent to +20 percent.

  • The average 20-year annual return can range from 3 percent to 18 percent.


    Alan Lavine and Gail Liberman are husband and wife columnist and authors of The Complete Idiot's Guide To Making Money With Mutual Funds, (Alpha Books).

    To read more columns, please visit the column archive.

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