Experts Ponder How Long Recession Will Last

A March 7 note from J.P. Morgan equity strategist Thomas Lee indicated that not only was the U.S. in recession, but it already had been for two months (and closer to three months today). In a typical short recession, the markets bottom out in five months, he wrote. A longer one could last a year or more.

Events that buffeted the markets since March 7 — further interest-rate cuts, the collapse and government-backed sale of Bear Stearns (BSC), and Monday's proposed overhaul of the Federal Reserve's oversight duties — seem to support his view but shed little light on how long the recession will persist.

With luck, and a good dose of intervention from the Fed, the hope among our pundits is that the recession — or a recession mindset among investors — won't last long. Ed Yardeni, an irrepressible bull and head of Yardeni Research, on March 4 described his own concession that the U.S. was in recession as "going over to the dark side."

By March 25, Yardeni wrote that "the current recession will be short and shallow as a result of the most extraordinarily stimulative combination of monetary and fiscal policies that they have ever provided. The stock market seems to agree with this assessment, for now. The market has rallied impressively over the past few days though the incoming economic data confirm that we are falling into a recession."

That's not to say the problems have disappeared, or that Yardeni's optimism was arrived at easily.

"Investors appear to be giving up," Citigroup's Tobias Levkovich wrote March 10. "Many investors continue to watch deteriorating equity market technical conditions which appear to be breaking down further. With new lows being established often on heavy volume, there is a foreboding sense of despair developing. No one seems to know what will get things turned around given bleak headlines citing record housing foreclosures, slipping net worth, bank write-offs, job losses and rising energy costs."

Levkovich called for more government intervention and cautioned it might take time for the Fed's effects to register.

So did bond guru Bill Gross, at Pimco, who penned an angry Investment Outlook for April that minced few words.

"In my opinion, the private credit markets have forfeited their privileged right to operate relatively autonomously because of incompetence, excessive greed, and in minor instances, fraudulent activities," he wrote. "As a result, the deflating private market's balance sheet is being re-nationalized in some cases with increased regulation, in others with outright guarantees and agency lending. Ultimately government programs which support private credit market assets may be required in order to prevent an asset deflation of significant proportions."

Ed Hyman, whose ISI Group relies heavily on survey data, advised that even if market sentiment supported a recession, the numbers did not quite go that far.

"The term recession is being used poetically," he cautioned on March 13. "Seventy-eight percent of executives say they expect a recession. However, when it comes to their companies, they're planning to increase employment by 0.6% and to obtain a 2.9% increase in productivity; taken together, the two suggest a 3.5% increase in unit sales."

But numbers don't always win out over emotions, Charles Schwab strategist Liz Ann Sonders wrote on March 26. "When looking at collective investor psychology, it reflects expectations about corporate earnings, interest rates, and stock market pricing and volatility," she wrote. "Often, when psychology is negative and risk-aversion is high, investors tend to abandon stocks in favor of bonds, even though Treasury yields are typically low and declining."

Investors need to be nimble and open to the new order a recession can impose on the markets, Merrill Lynch chief U.S. strategist Richard Bernstein pointed out on March 18.

"It is important for investors to keep their wits about them. Most assets are performing exactly as they should in an increasingly volatile environment," he wrote, urging investors to underweight financial-services stocks because they're now a classic value trap — that is, they're cheap, but they may not perform any better for a while.

That's not to say bold investors need to stay out of the market. Jeffrey Kleintop, chief market strategist at LPL Financial, said in his March 24 note that less-aggressive investors may be "too late to be early" to the upswing of the next business cycle, which will be starting to gather steam soon if it's a short recession, though that still remains an unanswered question.

That's what J.P. Morgan's Lee was hoping for in a March 12 note.

"We would be buying stocks in a 'short' recession," Lee wrote. "If [J.P. Morgan chief economist Bruce] Kasman's forecast of a short recession is correct, we believe investors should be buying equities now since stocks have risen 12% on average in every short recession since 1900 (positive returns 10 of 10 times). Because we are in month three, theoretically, of this recession, the rally from here could be even stronger, perhaps 20% over the next 12 months, according to our analysis."

For more of what our pundits are saying, read their latest predictions here.