US Recession Declared; Market’s Violent Reaction Due To Prospects Of More Pain or Typical Cyclical Behavior?

It took ONE year or 12 months for the National Bureau of Economic Research (NBER) to officially recognize that the United States is in a recession.

Yet if we look at the durations of past recessions we note that such economic cycle has ranged from 6-16 months as shown by the New York Times chart.

Of course, this time might be different. In considering the extent of spillover damage as a consequence to the extraordinary episode of intensive debt deflation- the seizure in the banking system compounded by forcible liquidations- the US recession could extend longer.

By how long?

That’s something we can’t say.

Nonetheless the global financial market’s response has seemingly been excessively violent. The selloff had been across the board and across wide array of asset classes, and had been one of the largest in terms of scale-if we measure the decline of the US S&P 500 this year.

Courtesy of Bespoke Investment

This could probably mean that either the deleveraging process has still ways to go or that markets have absorbed the official announcement as harbinger of more and longer pain.

But as Dr John Hussman says, the gist of the losses has usually been factored in, ``that substantial losses typically occur between the market's peak and the point that a recession is universally recognized, and major gains reliably begin only about three months prior to the end of a recession, and continue into the recovery.”

``Aside from that, between the point that a recession is well-recognized, and a short period before the recession ends, the market's direction is extremely variable and largely depends on how the economic news evolves, as well as the extent to which stock prices become oversold or overbought in the interim. There can be strong and prolonged advances during this period, as well as wicked declines from points where the market becomes overbought.” (emphasis mine)

That is if we reckon from the standpoint of typical market or economic cycles.

But what if the markets could be reading from the perspective of the economic consequences from the present and prospective interventionist policies from the incoming administration?