There has been a lot of debate lately on whether the United States is currently in a recession. Using the “old” standard of experiencing two quarters of negative GDP growth, I would say that we are. But whether we are or not isn’t of concern to what we are about to discuss, as I discuss where we were to where we are now, having been through eight (maybe nine) recessions since 1970.
To start, I’d like to take a trip down memory lane by laying out these eight recessionary periods, as many may have either forgotten or may not have lived through them all.
- December 1969 to November 1970 – Fairly Mild Recession
- November 1973 to March 1975 – primarily caused by Nixon taking the U.S. off the Gold standard which led to stagflation, as the price of gold skyrocketed while the dollar’s value plummeted
- January 1980 to July 1980 – primarily caused by the Fed raising interest rates dramatically to fight inflation of the 1970’s
- July 1981 to November 1982 – primarily caused by the Fed raising interest rates that reduced business spending, along with the Iranian oil embargo aggravating economic conditions by reducing U.S. Oil supplies, which drove prices up
- July 1990 to March 1991 – primarily caused by the 1989 savings and loan crisis, higher interest rates, and Iraq’s invasion of Kuwait
- March 2001 to November 2001 – primarily caused by a boom and subsequent bust in dot-com businesses. Also known as the dot-com bubble
- December 2007 to June 2009 (The Great Recession) – The longest contraction (18 months) since the Great Depression – primarily caused by the subprime mortgage crisis
- 2020 recession – caused by COVID
However, before we do that, we must understand one thing. Throughout history there has been NO pattern to the depth or duration of these economic contractions.
Why is this important?
Because it means that these periods cannot be forecasted or predicted (even if the talking heads of the financial media say it can be). Period. End of sentence. I say this so that you understand that even though they may be portraying it as the end of the world, history has shown us that it isn’t.
I’m not saying that these times weren’t significant economic crisis in our history, I’m only saying that through all of it, we have prospered, even though it may not seem that way as I am writing this in the middle of one of those periods.
Now, let’s try and calm the anxiety you may be feeling and look at the facts.
U.S. Real GDP: At the beginning of 1970 GDP adjusted for inflation was $4.95 trillion. If you look at that number today, as of June, that number is sitting around $19.7 trillion.
Share Values: Now GDP may not mean much to you, as a lot of people only focus on one thing, the markets. In this case, let’s look at the S&P 500 stock index. At the beginning of 1970, the S&P was 92.06. As I write this today, in the middle of a 6-day slide for the index (and 25% decline from its peak in January), it is sitting at 3,577. Almost 39 times higher than at the beginning of the first of our eight recessions.
Earnings: As I write this today, the current consensus earnings forecast for 2022 is around $225. Understanding how share values in the market are driven in the long run (hint: by earnings), you could possibly work your way backwards to know where it was at the beginning of 1970. That’s right, earnings, like share value, are up almost 39 times through these eight recessions.
Dividends: Now dividends from the S&P, which is the sum of money paid by a company to its shareholders from its profits, in 1970 earned $3.10 a share. As I write, the full-year consensus for 2022 is estimated to be $65 – which is about 20 times higher than it was in 1970. Why does this matter? Because even in the high-inflationary times, the CPI (which is our cost of living) is only up approximately 8 times. Meaning that in the long run, stocks on a pure cash-dividend basis, have not only kept up with the rising cost of living increases through these recessions but have done so with ease.
Now that you have the facts, you may be wondering what you are supposed to do with them. Take a step back for a moment and look at this time frame again – in its entirety. In uncertain times that we are currently experiencing, it can be easy to lose your sense of history and forget that we have been through all this before.
So, the next time you hear the dreaded words “this time it’s different”, try to have a different perspective – knowing we have been through times like this before and have prospered in doing so.
Source: Murray, Nick, Nick Murray Interactive – Volume 22 – Issue 10, October 2022
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