The National Bureau of Economic Research (NBER) defines a recession as "a period of decreasing economic activity." According to NBER we will no longer be in a recession "when we have reached a period of increasing economic activity." Some of the more recent data appears to show that we are reaching a bottom in the decline and may be stabilizing with economic growth likely next quarter. Less bad news doesn't mean our economic challenges are over, and stabilization is a tentative first step, but at least the direst of predictions have abated.

A great deal is often made of the fact that the stock market usually begins the next bull market before the recession ends and most market aficionados usually say that the bull market starts about 3-6 months prior to the end of a recession. The market in general has moved up 50% from its lows just five months ago showing an expectation for rapid growth.

There has been a great deal of discussion about the type of recovery that we will experience. A rapid recovery seems difficult given the level of wealth destruction that we have witnessed through the devaluation of home equity, the overall drop in the stock market (still down 37% from Oct 2007), and the negative effect on consumer spending driven by high unemployment. Consumers account for 65-70% of economic activity in the US and a retrenchment toward savings has already begun. Although the unemployment rate dipped to 9.4% from 9.5% in July, the employment-to-population ratio dipped to a 25 year low at 59.4%.

Given conventional wisdom, the stock market bottomed in early March meaning that the recession should be ending soon. The expectation for GDP for the third quarter of this year has been revised up by many economists to 3% based on stimulus programs like 'Cash for Clunkers' and inventory rebuilding. This stems from the need to replace goods that have been sold over the last 8-9 months and not yet been replaced.

Coming out of the recession in 2001, the Q1 GDP in 2002 was +3.5%. That large increase was driven by both government stimulus and a bounce back after the drop in travel and spending that occurred after the Sept 11, 2001 attacks. The recession was 'over' but GDP declined throughout the rest of the year and by Q4 of 2002 was only +.1%. The stock market fell another 25% during 2002 after rising 20% in the fourth quarter of 2001 because actual growth did not meet higher expectations. Could that happen again? Sure. Should you buy stocks now or should you wait? That decision can only be made by sitting down with a trusted advisor who understands your investment goals and where you are on the road to reaching them.

Stock markets, by there very nature, tend to exaggerate both pessimism and optimism. The rapid drop from Aug '08 – Mar '09 pushed pessimism to an extreme, and the bounce from the March low may be the other side of the coin. Optimism has pushed the market higher and faster than our current economic outlook would otherwise suggest. Only time will tell if market optimism has been misplaced.

Mark Stys is the Chief Investment Officer of Bluemont Capital Advisors, LLC. Mark can be reached at mstys@bluemontcapital.net.