The Dreaded R Word - Recession

The Dreaded R Word - Recession

May 16, 2022

In finance, there is a dreaded word that when heard makes many cringe, curl up into a ball and hide - due to the fear that comes with it.

That word is…Recession.

This one word can change the mindset of many smart individuals as it brings back bad memories of the multiple times they have lived through these recessionary periods (most notably the Great Recession in ’08).  

The problem is, because of one’s emotions, many tend to forget (or do not know) many of the facts surrounding these times and always believe that “this time it’s different”. It doesn’t help that the financial media loves to target one’s emotions and portray these times in the market as the end of the financial world as we know it.

But let’s put emotions aside and dig into the facts that won’t be talked about from the soothsayers in the financial media.

The source for these is Wikipedia's article on the history of recessions, which includes the National Bureau of Economic Research's (NBER) “official” data.

  • Just since 1980, there have been six recessions, an average of one every seven years.
  • The longest - surrounding the Global Financial Crisis. It ran for a year and a half from December 2007 to June 2009; GDP declined 5.1% from peak to trough.
  • The shortest - the COVID-19 shock recession. It ran from February to April 2020 and took GDP down 19.2%.
  • The average duration of the six recessions was 10 months, and the average GDP decline was about five percent (minus the COVID-Crash, the average GDP decline was just over two percent).
  • The total number of months from January 1980 through April 2022 was 508. The total number of months of decline in the six recessions was 58. Running the math…during this period the U.S. economy was expanding 88% of the time.
  • According to the Federal Reserve, real (inflation adjusted) GDP per capita in the first quarter of 1980 was $30,174. For the fourth quarter of 2021, it was $59,553. During these four decades when the American economy was experiencing six recessions - U.S. real GDP per capita doubled.
  • On January 2, 1980—the first trading day of the analysis we're performing —the S&P 500 closed at 106. As I write it is around 4,020. The dividend in 1980 was $6.44; in 2021 it was $60.40. The average annual compound rate of total return of the S&P 500 in this period was 11.8%.

Now that we know the facts, one may conclude that recessions – as history has provided – may not be too painful, if you are a long term, goal-focused, planning driven investor.

Unfortunately, facts matter little when fear engulfs our minds - as you are having the “R” word shouted at you every day on the hour.  All you hear is (or better said, feel) “A recession is coming, and you gotta to get out of the stock market!”

At such moments, the preceding fact, become little more than background noise.

So, let’s look at following observations, which I would offer during a financial planning conversation:

  • A recession is either coming or it's not.
  • If a recession comes, there’s no reliable way to predict when it will begin, how deep of a peak-to-trough GDP decline, nor when it will end.
  • There’s no reliable correlation between the onset of a recession and an equity market top, or between the end of a recession and a market trough.
  • If anything—the equity market tends to trough well before the recession ends—and very long before the NBER confirms that the recession is over.
  • Once again, we find that the economy cannot be consistently forecast, nor the market consistently timed.

Furthermore, let’s look at it in the context of our current environment. As you can see from high prices in everyday goods and services, we are in high-inflationary times. Primarily caused by the Federal Reserve excessively expanding the money supply for far too long. Now, it must begin withdrawing the excess by shrinking its balance sheet and raising interest rates, in order to control inflation.

This is a must do, and if to get inflation under control we go into a recession, then we will go into a recession. And if that recession in turn causes the equity/bond market to temporarily sell off further and longer than it already has (key word being temporarily), then a rational long-term investor must not only endure this decline but embrace it.

So, the next time you think of or hear the dreaded “R” word, take a deep breath, and think about the facts and always remember that this too shall pass.

Disclosures:

Advisory services are offered through Melone Private Wealth, LLC (“Melone Private Wealth”). Advisory services are only offered to clients or prospective clients where Melone Private Wealth and its representatives are properly licensed or exempt from licensure. For additional information, please visit our website at https://www.meloneprivatewealth.com/.

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