Recently there has been a thought circulating that the worse the recession (or economic weakness) the stronger the following economic rebound. This refrain has been heard from various quarters.
This belief does appear to be historically accurate, at least to some degree.
However, there are three aspects of this belief that I want to elaborate upon. The first is that even if one believes “the deeper the recession, the stronger the recovery” theory, there is a question of timing. If the period of economic weakness is long, mistaking the timing and making investments or other financial commitments too early in the cycle, before the recovery has begun, can be a costly and painful mistake.
Second, even if one has complete faith in this belief, this has to be viewed as a historical fact. Is this time “different?” It certainly appears to be, as I have extensively commented upon. Perhaps the operative phrase should be “Past performance is no guarantee of future results.”
Third, this belief seems related to one that I commented on in a June 5 blog post – with the same implications. Here is that blog post:
SPX at 1061.05 as this post is written