Current credit crisis comparing to 91-92 and 01-02 recession

Just read an interesting article in WSJ 2008/09/19 A3, U.S Economy's Prospects Worsen. The article compares current economy situation with two previous recession during 91-92 and 01-02. The figure shows that during 90-92, 00-02, Wholesale and retail sales has percentage change dip to -4% at bottom, Personal Income dip to -2% , Industrial peroduction dip to -4% and -6%, Jobs dip to -2%. And at this time, the 4 figures are at about -1%, -1%, -2% and 0%. We are not in recession now but future is pretty dim. People say that the financial crisis is the worset since 1929 great depression. Recession seems inevitable. Then the 4 figures should go donw more to at least match 90's and 00's. Take a look at s&p500 index, during 90-92, it bottomed on 10/19/1990, about 3 months earlier before all 4 figures bottomed. During 00-02, s&p 500 bottomed on 10/4/2002, about a year after all 4 figures bottomed. We should following the 4 figures closely and if the 4 figures drop furthure, then we can assume it bottomed out. We can then be more confident in the stock market. At this time, even US government has a proposal to control the system risk of financial market by acquiring toxic asset from banks, which triggered last 2 days massive stock market rally, the underline economy condition has little change. If the 4 figures continue to drop, the rally cannot last. One interesting thing is in both previous recession, stock market bottomed in Oct. Is it just conincident? I don't know. Because of the credit crisis, it's hard to get loan from the market. That's why Fed inject hundreds of billioin dollars into the market. LIBOR rate shot up from about 2.18% this tuesday(9/16) to over 5%. Fed expand its currency swap line with other country's central banks on Thursday which reduce Libor to 3.84% on Thursday. It rised again on Friday indicates that market is still worrying about the credit situation. Small companies can only get loan from private sector which is very difficult and expensive. Fed's money is for big fishes like MS or GS. I think the credit crisis should hurt small cap companies more. Historically, small cap outperform large cap in good year and lag behind in bad years. So far this year, since financial sector is beaten so badly, russel 2000 index(IWM) outperform s&p500 by about 24%. It might be time the performance converge. Maybe we can long s&p500(IVV) and short IWM. However, once bottom is confirmed, reverse trade should be done.

[luzz]

However, small cap is most sensitive to market rally, small cap index shot up 7% on thursday. But it also means it will come down steeper when market is not that good. So next week, need to follow IVV and IMM closely to see if such claim is correct or not.