[jyl]

My rule of thumb is that the market bottoms about six months to a year before the economy bottoms. Investors are anticipatory, and when they see the upturn coming, they want to buy ahead of the upturn.

Suppose the US will enter a recession in early 2008, which is what I believe.

Conventionally, recessions don't last that long - 2 to 4 quarters. In that case, the US economy might bottom sometime in 2H08, and the market might bottom in 1H08.

Plus, stocks are reasonably cheap, 2008 is an election year, the Fed is actively easing, a $100BN/yr war will end in 2009, and good growth in the rest of the world is helping exports. So, under a conventional scenario, the market should be set up for a recovery in 2H08 and into 2009.

One uncertainty is, how deep will the recession be? In other words, how far down should stocks go, before they bottom? It depends on whether the coming recession is only in the US, or if it pulls in Western Europe, or pulls in Asia and emerging countries too.

I think the market has mostly discounted a US-only recession. Can't be precise, just my feeling based on how much certain sectors have declined - look at consumer stocks and financial stocks. The market is starting to discount at least a slowdown in the rest of the world, but has much further to go down if we get a full global recession.

Another uncertainty is, how long will the recession last? The US housing bust will drag on at least through 2009 and likely 2010, I expect. It will be a multi-year process for US consumers to repair their balance sheets.

But the economy can grow, and the market can rise, while housing is still completing its bust - see the early 1990s. All those housing related jobs will be lost in the first years of the bust, after that it isn't an incremental negative.

So my working assumption is the market bottoms in 1H08 under an optimistic scenario (recession is US-only), or goes down a good deal more and bottoms in 2009 under a reasonably pessimistic scenario (recession spreads globally). I'd watch the economic news from Europe, Japan, and China as the best clue for which it will be.