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You're probably getting all sorts of conflicting messages
these days.
On the one hand, just months ago you heard gloom-and-doom
predictions from luminary economists like Nouriel "Dr. Doom"
Roubini, calling an S&P 500 bottom possibly as low as 600
-- roughly 40% below yesterday's close. While Roubini has
turned less bearish lately, he and most economists agree that
we're certainly not out of the woods yet.
At the same time, you have the world's most respected
investor, Warren Buffett, saying that now is a good time to
buy. Buffett is also putting new money to work, buying shares
of
Ingersoll-Rand (NYSE: IR) earlier in the
year, and announcing this week that he'd be acquiring
Burlington Northern .
What's a Fool to do?
With so much debate over what has been roundly dubbed
"the worst financial crisis since the Great Depression," I
wanted to actually look back at how various strategies fared
during each of the other financial crises since the Great
Depression.
To get started, I turned to trusty data from Ibbotson
Associates, a leading authority on investment research. I
calculated the historical returns for cash, bonds, and stocks
for those who invested the year following the start of each
recession and measured the five-year annualized return for
each period.
Here are the results:
Recession
T-Bills
Corporate Bonds
S&P 500
Inflation
March 2001 - November 2001
2.3%
7.8%
6.2%
2.7%
July 1990 - March 1991
4.3%
12.2%
16.6%
2.8%
July 1981 - November 1982
8.6%
22.5%
19.9%
3.3%
January 1980 - July 1980
10.3%
17.9%
14.7%
4.9%
November 1973 - March 1975
6.2%
6.0%
4.3%
7.9%
December 1969 - November 1970**
5.8%
6.0%
3.2%
6.9%
April 1960 - February 1961
3.1%
3.8%
13.3%
1.3%
August 1957 - April 1958
2.4%
3.6%
13.3%
1.3%
July 1953 - May 1954
1.9%
1.0%
22.3%
1.5%
November 1948 - October 1949
1.5%
1.9%
17.9%
2.2%
February 1945 - October 1945
0.8%
1.8%
9.9%
6.6%
May 1937 - June 1938
0.1%
3.8%
4.6%
3.2%
August 1929 - March 1933
1.0%
8.1%
(9.9%)
(4.8%)
Average return
3.7%
7.4%
10.5%
3.1%
Frequency of outperformance
8%
38%
54%
NA
Data from Ibbotson Associates,
Salomon Brothers Long-Term High-Grade Index, National
Bureau of Economic Research, Consumer Price Index, and
author's calculations.
**Returns calculated from 1971 to 1975.
Rule your recession
Three lessons stand out from this data:
Best Buy (NYSE: BBY) and
Chevron ( NYSE: CVX) did even better than
the S&P 500 average the last time around.
Unless you need money or plan on investing it, don't
park your capital in cash or Treasury bills. If you're
bearish enough on stocks to avoid the stock market, history
shows that it's much better to invest in a diversified
batch of long-term, high-grade corporate bonds. For
instance,
iBoxx Investment Grade (LQD) is an ETF that
invests in the debt of stalwarts like
PepsiCo and more resilient financials such
as
American Express (NYSE: AXP).
The only period the S&P 500 lost money was the
1930-1934 deflationary death spiral, when deflation ran a
chilling 5% annually. Inflation is basically flat, and so
long as it doesn't plunge well below zero for an extended
time, investors who are looking to buy a diversified basket
of stocks today are well-positioned.
But that's not the whole story
Various studies -- including
one of my own-- show that small-cap
stocks tend to outperform their larger counterparts by a
significant margin, particularly in recessions. To confirm
this, let's look at the table again, this time including
small stocks -- defined by Ibbotson as the smallest quintile
of stocks:
Recession
T-Bills
Corporate Bonds
S&P 500
Small Stocks
March 2001 - November 2001
2.3%
7.8%
6.2%
15.2%
July 1990 - March 1991
4.3%
12.2%
16.6%
24.5%
July 1981 - November 1982
8.6%
22.5%
19.9%
17.3% Continued... |