How long will the current recession last?

Several posts have been written addressing this exact same question by many bloggers. The point of this post is not just to propose yet another speculation, but instead to emphasize an alternative question which is somewhat more important and practical from the investor point of view.

... how long ??

The most common approach taken by bloggers to predicting the length of the recession is a 'historical perspective'. These fancy words just means that you look at past data, see how long past recessions have lasted and then make a guess based on it. Perhaps any such discussion would be incomplete without mentioning the following beautiful graphical summing up of four major recessions in the past (including the great depression) by dshort.com. You will find a lot on historical perspective on current recession in form of pretty graphs like the one below on this site.


Based on the above graph, you then churn out your own approach and make a speculation.
Here are some example guesses:

1. Optimistic Guess: The current recession is certainly not as bad as not as bad as great depression. Other recessions have resulted in roughly 50% drop in stock market. We already have seen this. Thus we do not have a long way to go.Maybe mid 2009?
2. Popular Guess: The current recession is somewhere between great depression and other recessions. Looking at the above graph, we are roughly half-way. Perhaps the current recession will last into late 2010.
3. Pessimistic Guess: The current recession will be nasty, result in decade long depression.

One small point to be noted is that the answer to "how long?" maybe very different depending on which part of the world you live in.

...but

...but , approaches based on historical perspectives are fundamentally incapable of predicting new phenomenon. As an investor, rather than speculating how long?, it is more important and practical to understand 'how to differentiate those deceptive short rallies from actual improvements in economy?'. Looking at the above graph you will notice that in a recession, stock market curves do not fall straight down. The trend rather is down, then short rally (sometimes called a relief rally), then again down and so on. As an investor you would possibly take the following action in a recession. (a) Liquidate most of your investments (b) Reinvest when you see signs of improving economy and are sure that we are going out of the recession. What then becomes more important is to try to tell a short relief rally apart from a certain beginning of a new bull run or a boom.

How to be absolutely sure that the current recession has ended?

Here are indicators which I think are guaranteed signs of the economy finding its way out of recession.

1. Oil price in the range of $90-$100 (in case of further production cuts one has to adjust this price accordingly)
2. A consistent steady improvement in industrail output. (As an investor you have to learn the discipline of regularly watching the data on industrial output, especially in times of recession)
   
3. A steady at least 3-4 month improvement in housing prices- or alternatively an emergence of a V-shape in housing price graph. I recommend viewers to keep visiting Calculated Risk for housing news especially for housing prices in US.
   

The end of past recessions have resulted in more or less sharp increases in housing prices, oil demands. Increase in industrial output is almost tautological to improvement in economic activity.
this post was included in Carnival of Personal Finance 189.