HISTORY repeats itself, first as tragedy and secondly as farce. After that it’s pantomime, then vaudeville, kabuki theatre and sometimes rock opera. That is why those who do not learn from history are condemned to suffer a lot of generic drama.

This time around, we are trapped in a 1950s monster movie. The story so far: boffins messed with the natural laws of the housing market, creating a toxic slick of worthless paper that has leaked from Wall Street and mutated the US economy. Now the thing they call Subprime has crossed the Atlantic and, having rampaged through Newcastle, is bearing down on landmark institutions in London. But can the growing superpowers of Mothra and Rodan – sorry, India and China – rescue the world from? ...well, you get the picture.

No two stories are ever precisely the same. The toxic loans currently warping the banking sector, for example, have no obvious parallels with the dot-com implosion of 2001 or the fuel crises either end of the Seventies. But recessions, like monster movies, tend to have more similarities than differences. If you watch a few, you can usually predict who will be victorious by the time the credits roll.

Before we begin, a disclaimer: it is best to ignore the pedant’s definition of a recession as two consecutive quarters of negative economic activity. Only dismal people obsess about this measure, which is the economist’s equivalent of pointing out rogue apostrophes at the greengrocer’s stall. For our purpose, take recession to mean a period when average corporate profits go into reverse for long enough to hurt markets.

In Europe this has happened only four times since Larry Hagman’s seminal Beware! The Blobwas in the cinemas: the postmillennial technology crash, the oil crises of 1973 and 1979 and the bailout of US savings and loans institutions in the early Nineties. On average during these periods, European corporate earnings fell by almost 40 per cent from peak to trough over 20 months.

It would be a mistake, however, to assume that financial markets followed the same path. Economies and equities rarely move in lockstep.

J. K. Galbraith, the economist, compares the relationship to a man walking his dog. Often the market will bound ahead without recognising that the economy is tiring and will calm its irrational exuberance only after a few sharp tugs on the leash. The market will then stop, wait for the economy to overtake, then keep dragging its paws until the leash becomes uncomfortably tight again.

This, broadly speaking, is how each of the past four earnings recessions played out. Stocks went into decline about a year before corporate earnings reached their peak and started rallying a couple of months after earnings bottomed out. The average decline for equity bench-marks was 33 per cent from peak to trough.

So how does this compare with where we are now? The MSCI Europe index, which tracks Europe’s 16 largest markets, dropped 23 per cent between its peak last June and its trough late last month. Corporate earnings are trickier to gauge, but while the pace of growth has been slowing since 2004, an average of analysts’ forecasts suggests nearly 10 per cent European profit growth this year. That puts the European bench-mark at about 13 times forward earnings expectations – not historically cheap, but not particularly expensive either when earnings have not yet reached peak levels. That kind of argument has been behind a 4 per cent rally in the MSCI Europe index over the past few weeks.

There is a flaw to the logic. Analysts always predict annual profit growth of 10 per cent. It was their average forecast during the technology boom, when growth topped 20 per cent, and it was their forecast throughout the past two recessions, when earnings dropped by as much as 30 per cent. It seems that, despite the warning signs, the teenage scribblers never see the monster coming.

And if the story plays out as before, will investors have anywhere to run or hide? Based on the past four recessions, mining stocks have been the sharpest fallers and pharmaceuticals the most resilient, but this was before the emerging superpowers flipped the script. China is now expected to keep consuming raw materials no matter what happens to the rest of the world, while Indian factories have been flooding the drugs market with generic clones of almost every pill that loses patent protection.

Otherwise, it is the utilities and healthcare firms that tend to outper-form in a downturn. So do companies making or selling cheap food, drink, soap and cigarettes. Media and technology tend to suffer most, along with capital goods makers and the consumer services industries.

Equity valuations may look fair when viewed from the bottom up, but the earnings picture keeps deteriorating when viewed from the top down. If the economists are right and analysts wrong, it would throttle any chance of a sustained recovery. And as a host of Godzilla movies suggest, it is unwise to assume victory unless the beast has been choked.

Bryce Elder is editor of Hemscott.com