This week the National Bureau of Economic Research stated that the current recession began in December of 2007, which means we are entering the 12th month of the recession.  Wall Street did not like the news that the recession is now official, resulting in a sharp drop in stock prices last Monday.  However, there may be a silver lining in this official declaration of the recession which has been widely avoided by the Bush administration. Since World War II, the two longest-lasting recessions, in 1973 and in 1981, have lasted 16 months.  If this recession is in its 12th month and if it lasts as long as the worst two recessions in the post-war era, we may be as close as 5 months away from a recovery.

From an investment standpoint, the premise above can have broad implications.  First of all, historically stocks hit bottom and start ascending about five to six months before the end of a recession.  If history repeats itself, and if the premise above holds true, we should be hitting bottom just about now.  More importantly, once stocks start a rebound after a recession, they have on average gained 32.4% a year after hitting bottom.

In the last 10 recessions, stocks have been higher or unchanged a year from the start 70% of the time.  These are certainly encouraging odds.  Here is how the S&P 500 has performed a year after the start of the last 10 recessions:

November 1948 – Up 7.5%

July 1953 – Up 24.9%

August 1957 – Up 5.6%

April 1960 – Up 19.9%

December 1969 – unch.

November 1973 – Down 27.1%

January 1980 – Up 13.5%

July 1981 – Down 18.2%

July 1990 – Up 8.6%

March 2001 – Down 3.0%

We are currently down 44.4% in the 12th month of the current recession – much lower than the worst case scenario above which happened in 1973.   One might argue that this implies that the odds are good that things should start improving soon.

However, the big question in everyone’s minds and the skepticism coming from Wall Street is whether this time it is different.  Is this an unprecedented recession with unpredictable consequences?  Will this recession be much deeper and last much longer than the last two recessions since World War II?  Keep in mind that most economists discard the possibility of a depression like the one experienced in 1932, but there is only so much worse the current recession can get before the “d” word starts to pop its ugly head.

Certainly it is nearly impossible for anyone to predict a bottom, and we don’t want to navigate through the dangerous waters of predicting what will happen to the stock market in the near-term.  As discussed in the past, wise investors avoid market timing strategies and stick to proven techniques that have worked time and time again regardless of the economic environment.  Such techniques include diversification, risk-adjusted asset allocation, and dollar-cost averaging just to mention a few.  We certainly do not want to deviate from these time-proven strategies.

But even disciplined investors can’t help but wonder when things will turn around.  The fact is that, based on historical data, we are entering a period where a rebound in the stock market is in the realm of real possibilities.  This gives investors much needed hope of better things to come.  Even if this recession turns out to be worse than we hope for, just knowing that we are starting to enter a period where a rebound is likely– even if it takes another 3 to 6 months – is certainly reassuring.

One thing is for sure.  As discouraging as drops like last Monday’s may be, this is the wrong time for long-term investors to give up on stocks.  If you believe history will repeat itself, and you don’t think we are in a 1932 depression-like era, this may be the time to start turning bullish.