This video from August 2006, shows Peter Schiff on CNBC’s Kudlow and Company in debate with Art Laffer, a Reagan economic advisor and creator of the Laffer Curve (shows how raising tax rates often results in reduced tax revenues).  Peter Schiff is an economic advisor to Texan Rep Ron Paul(R), and the author of Crash Proof: How to Profit From the Coming Economic Collapse (Lynn Sonberg Books)

.  They all but “Laff” him off the show for his predictions, but watch and see how much he says has come true. I have met Art Laffer a couple of times as he was a keynote speaker at some financial adviser conferences. He has always carried the bullish briefcase and held the steadfast belief in trickle down economics. He is consumate proponent of Reaganomics.

Click here to view the embedded video.

According to the National Bureau of Economic Research, a recession can be defined as

“a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale retail sales. A recession begins just after the economy reaches a peak of activity and ends as the economy reaches it’s trough. Between trough and peak, the economy is in an expansion. Expansion is the normal state of the economy; most recessions are brief and they have been rare in recent decades.”

Looking back on the last 9 recessions (since 1953) provides valuable clues as to how this current one may play out.

• On average, recessions last 11 months. Stocks begin their descent 6 months earlier,  and it lasts about 12 months, or into the middle of the recession.  During this period the average return on stocks was a negative 21%.

• Then, as the markets discounts economic recovery, the returns turn positive, and the upward slope for stock prices averages a +36% return.

• Through the entire “recession cycle”, investors have averaged +8%.

The worst return, pre-recession to post-recession, since 1953, began in 2000, when the dot-com bubble burst,  the 9/11 attacks occurred, and corporate accounting scandals were headlines.
Investors suffered a loss of 30% pre-to-post-recession, then in 2003 the they enjoyed a gain of 28.5% .

The next worst was Nov ’73 to March’75, a loss of 22%,during OPEC price-quadrupling, Watergate scandals, and Vietnam War spending.

From June 2007 through June of 2008, the S&P 500 has lost  18.25%.  So we may have more time and further stock price reductions.

….Or not. The problem is that these things are not predictable. The economy is a model of complex pulleys, wheels, and levers. There are many possible outcomes.

But we do know that patient investors average 8% from pre to post-recession, on average, if they simply weather the full market cycle.
Well-allocated investors can reduce the peak-to-trough impact and “smooth the ride” by owning a sensible bond fund or ladder, which typically perform well when interest rates decline. Interest rate declines are common when stock prices are falling.

-Sources include: Jennison Dryden