Recessions and Equity Asset Allocations

Riepe, Mark W.
February 2002
Journal of Financial Planning;Feb2002, Vol. 15 Issue 2, p34
Academic Journal
On November 26, 2001, the National Bureau of Economic Research announced that a recession began the previous March. Since all previous United States recessions eventually ended, it seemed timely to examine haw large-and small-cap stocks behaved during and after recessionary periods. Small stocks have had higher returns, on avenge, during the last four recessions. The average returns for these different equity asset classes have not been all that bad during the last four recessions. If one accepts the proposition that the stock market is a leading indicator, this not-so-bad performance may have been boosted by exceptional performance in the last few months of the recession. History suggests that waiting until everything is rosy on the economic front (that is, when the recovery is readily apparent) increases the likelihood that one will miss out on a meaningful portion of the robust returns, and those returns are greatest in the smaller stock categories. However, investors must pursue strategies such as this one with caution. Predicting recessions is difficult and, because every recession is different, there are certainly no guarantees as to how any group of stocks will react.


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