Historical Data May Indicate Future Recession

In U.S. History, We Have Experienced Many Market Recessions:

Causes varied greatly and could often be tied to contractionary monetary policy, instituted to reduce inflation. “Contractionary policy refers to either a reduction in government spending, particularly deficit spending, or a reduction in the rate of monetary expansion by a central bank. It is a type of policy or macroeconomic tool designed to combat rising inflation or other economic distortions created by central bank or government interventions.1” Others resulted from transitions in national production methods. Many would even say that we are in a period of transition now, as services transition to becoming fully digital and brick-and-mortar stores experience heavy online competition.

I created this blog post to give you a little more perspective on how a recession can affect our economy and investments. We have seen several indications that we may be entering a new bear market. When you combine these indicators with market volatility, you can see some patterns emerging.

1869 – 1870: Post-Civil War Recession, followed by financial panic (Business: -9.7%)3

1871-1898:

Beginning S&P500 Time Period End S&P500 Avg. Annual Return
1871 4.44 27 years 1898 4.88 0.35%

Recessionary Periods:

Panic of 1873 and the Long Depression: Failure of largest U.S. Bank, devaluation of silver, deflation and wage cuts (Business: -33.6%)4-6
1882-1885 Recession: Price Depression, devaluation of iron and steel, Panic of 1884 (Business: -32.8%)7
1887-1888 Slight Recession: less rail and construction investment (Business: -14.6%)8
1890-1891 Recession: International monetary disturbances, such as Panic of 1890 in The UK (Business: -22.1%)8
Panic of 1893: Failure of major railroad, withdrawal of European investment led to stock and bank collapses (Business: -37.3%)9-10
Panic of 1896: Less production and deflation (Business: –25.2%)8

1898 – 1924:

Beginning S&P500 Time Period End S&P500 Avg. Annual Return
1898 4.88 26 years 1924 8.83 2.30%

Recessionary Periods:

1899-1900 Recession: Mild recession with little data (Business: -15.5%)8
1902-1904 Recession: Decline in national, industrial and commercial production. Followed 1901 Stock Market Crash (-16.2%)8
Panic of 1907: sell-off of Knickerbocker Trust Company led to severe monetary contraction. Led to creation of the Federal Reserve System, that is still around today (Business: -29.2%)11
Panic of 1910-1911: Commercial and industry decline, marked by deflation (Business: -14.7%)8
Recession of 1913-1914: Production and income declined, the Federal Reserve Act (Business: -25.9%)8,11
Post-World War I Recession: severe hyperinflation in Europe, end of wartime production, high veteran unemployment (Business: -24.5%)12
Depression of 1920-1921: Most deflationary period in U.S. history, GNP dropped 2.5-7% (Business: -38.1%)13-14
1923-1924 Recession: Mild recession in the midst of transitions to peacetime economy (Business: -25.4%)8

1924-1942:

Beginning S&P500 Time Period End S&P500 Avg. Annual Return
1924 8.83 20 years 1942 8.93 0.05%

Recessionary Periods:

1926-1927 Recession: an unusual, mild recession, potentially caused by Henry Ford closing factories for six months (Business: -12.2%)15
Great Depression: Banking panic and collapse in money supply. Worsenned by gold standard abroad & new tariffs. Drop in GDP, industrial production, employment and prices (GDP Decline: -26.7%)17-21
Recession of 1937-1938: tight fiscal and monetary policy and declining profits reduced investment domestically (GDP Decline: -18.2%)22

1942-1969:

Beginning S&P500 Time Period End S&P500 Avg. Annual Return
1942 8.93 27 years 1969 102 9.43%

Recessionary Periods:

Recession of 1945: decline in government spending reduced GDP. Economy transitioned from war to peace with little unemployment (GDP Decline: -12.7%)23-24
Recession of 1949: brief downturn, followed by contractual monetary policy (GDP Decline: -1.7%)16,25
Recession of 1953: Inflation after Korean War led to national security fund transfers. Continued monetary restriction to prevent inflation or economic bubble (GDP Decline: -2.6%)16,26-27
Recession of 1958: tightening money supply led to budget deficit (GDP Decline: -3.7%)16
Recession of 1960-1961: preceded by Federal Reserve raising interest rates and followed by long period of growth (GDP Decline: -1.6%)16

1969-1980:

Beginning S&P500 Time Period End S&P500 Avg. Annual Return
1969 102 11 years 1980 110.9 0.76%

Recessionary Periods:

Recession of 1969-1970: Mild recession followed by growth. Policy to reduce post-Vietnam War deficits and contractionary monetary policy (GDP Decline: -0.6%)16
1973-1975 Recession: Stagflation because of OPEC raising oil prices and stock market crash (GDP Decline: -3.2%)28-29

1980-2000:

Beginning S&P500 Time Period End S&P500 Avg. Annual Return
1980 110.9 20 years 2000 1425.59 13.62%

Recessionary Periods:

1980 Recession: short recession followed by quick growth and deep recession. Started after Fed dramatically increased interest rates to fight stagflation (GDP Decline: -2.2%)16,30
1981-1982 Recession: 1979 energy crisis began after Iranian Revolution raised oil prices. Tight monetary policy to prevent more inflation exacerbated this and led to another recession (GDP Decline: -2.7%)31-32
Early 1990s Recession: Fed raised interest rates to reduce inflation and a brief recession was caused by a combination of 1990 oil price shock, 1980s debt and consumer pessimism (GDP Decline: -1.4%)33-35

2000-2013:

Beginning S&P500 Time Period End S&P500 Avg. Annual Return
2000 1425.59 13 years 2013 1480.4 0.29%

Recessionary Periods:

Early 2000s Recession: Following the largest growth in American history (the 1990s), the collapse of the dot com bubble, less business investment and September 11th, growth slowed (GDP Decline: -0.3%)36-37
Great Recession (2007-2009): Mortgage crisis started housing bubble collapse, causing a global financial crisis. Led to the collapse of many financial institutions and subsequent bailout & stimulus packages. Dow Jones bottomed out on March 9th, 2009 (GDP Decline: -5.1%)38-39

2013 – 12/3/2018:

Beginning S&P500 Time Period End S&P500 Avg. Annual Return
2013 1480.4 5 years 12/3/2018 2790.372 13.58%

Recessionary Periods:

None

Patterns Predating Recessionary Periods:

Many of the economic events listed above were caused by similar events, such as energy shortages, war, and divestment in The United States. While we are lucky to steer clear of these factors thus far, other possibilities are still likely to slow down the economy.

Analyzing historical economic data, you can see that The Fed increased interest rates in the months leading up to several previous recessions. While The Fed mostly restricts the money supply to prevent issues with inflation, this often results in currency appreciation and subsequently, less investment domestically.

It is rare to see a period of economic growth that lasts 10 years and we are close to the completion of that arbitrary period. This does not indicate that a recession is imminent, but it makes that possibility more likely, as the economy is cyclical.

Finally, in the early 1980s, we saw high average annual returns that are similar to the current state of the market. The early 1980s was a period of inflation and The Fed had to institute contractionary monetary policy to prevent hyperinflation. While we are lucky to have avoided the energy supply shortages of this time period, we are already experiencing a slowing economy to counter inflation. The Fed may even raise interest rates further in 2019.

Financial professionals can never fully determine magnitude or timing of economic shifts, but we can identify indicators that a shift may occur. As we see more of these indicators, the probability of a recession increases in the short-term. Some indicators that you may want to keep in mind are below.

Speculative Economic Indicators of Possible Bear Market:

What Should I Do?

Please Contact a Financial Professional

When it comes to investment, one of the biggest causes of loss is human emotion. It blinds us to the logic of a situation and may cause us to make decisions like selling off assets in a market downturn. In the long-term, many investments are able to break-even or attain their original value. However, this all varies wildly based on your portfolio mix and you should always consult a financial professional before making rash divestment decisions.

Contact Me For a Review of Your Investments: (512) 638-9499.

I will help you weigh the risks and protect your retirement income from recession.

Sources:
  1. Investopedia, Apr. 29, 2018. “Contractionary Policy” https://www.investopedia.com/terms/c/contractionary-policy.asp. ACCESSED Dec. 7, 2018.
  2. The Wall Street Journal, Dec. 7, 2018. “S&P500 Index” https://quotes.wsj.com/index/SPX. ACCESSED Dec. 7, 2018.
  3. Zarnowitz 1996, pp. 222–23
  4. Foner, Eric (January 10, 1990). A Short History of Reconstruction. Harper Perennial. ISBN 0-06-096431-6.
  5. Capie, Forrest; Wood, Geoffrey (1997). “Great Depression of 1873–1896”. Business cycles and depressions: an encyclopedia. in Glasner & Cooley 1997, pp. 148–49
  6. Moseley, Fred (1997). “Depression of 1873–1879”. Business cycles and depressions: an encyclopedia. in Glasner & Cooley 1997, pp. 148–49
  7. Fels, Rendigs (1952). “The American Business Cycle of 1879-85”. The Journal of Political Economy. 60 (1): 60–75. doi:10.1086/257151. JSTOR 1826297.
  8. Zarnowitz 1996, pp. 226–29
  9. Whitten, David (August 14, 2001). Whaples, Robert, ed. “Depression of 1893”. EH.Net Encyclopedia. Archived from the original on April 27, 2009. Retrieved October 5, 2009.
  10. Lk (2014-02-20). “Social Democracy for the 21st Century: A Realist Alternative to the Modern Left: US Unemployment in the 1890s Again”. Social Democracy for the 21st Century. Retrieved 2017-07-21.
  11. Bruner, Robert F.; Carr, Sean D. (2007). The Panic of 1907: Lessons Learned from the Market’s Perfect Storm. Hoboken, New Jersey: John Wiley & Sons. ISBN 978-0-470-15263-8.
  12. Goldberg, David J. (January 15, 1999). Discontented America: The United States in the 1920s. The Johns Hopkins University Press. ISBN 0-8018-6004-0.
  13. O’Brien, Anthony Patrick (1997). “Depression of 1920–1921”. Business cycles and depressions: an encyclopedia. in Glasner & Cooley 1997, pp. 151–53
  14. Vernon, J.R. (1991). “The 1920–21 Deflation: The Role of Aggregate Supply”. Economic Inquiry. 29. doi:10.1111/j.1465-7295.1991.tb00847.x. Archived from the original on 2010-11-13.
  15. Kindleberger, Charles P. (1973). The World in Depression, 1929-39. Berkeley: University of California Press. p. 43. ISBN 0-520-05592-6.
  16. Labonte, Marc (January 10, 2002). “The Current Economic Recession” (PDF). Congressional Research Service. Archived from the original (PDF) on October 10, 2009. Retrieved October 5, 2009.
  17. Friedman, Milton. The counter-revolution in monetary theory: first Wincott memorial lecture, delivered at the Senate House, University of London, 16 September 1970. Vol. 33. Institute of Economic Affairs, 1970.
  18. Irwin, Douglas A. Did France Cause the Great Depression?. No. w16350. National Bureau of Economic Research, 2010.
  19. Eichengreen, Barry; Temin, Peter (2000). “The gold standard and the great depression”. Contemporary European History. 9 (2): 183–207. doi:10.1017/s0960777300002010.
  20. Irwin, Douglas A. Peddling Protectionism: Smoot-Hawley and the Great Depression. Princeton University Press, 2011.
  21. Romer, Christina D (1992). “What ended the great depression?”. The Journal of Economic History. 52 (4): 757–784. doi:10.1017/s002205070001189x.
  22. Smiley, W. Gene (1997). “Depression of 1937–1938”. Business Cycles and Depressions: An Encyclopedia. in Glasner & Cooley 1997, pp. 154–55
  23. Zarnowitz 1996, p. 229
  24. Rosnick, David (2 June 2010). “Clearing Up Some Facts About the Depression of 1946”. Retrieved 2017-07-21.
  25. Zarnowitz 1996, p. 416
  26. Dell, S. (June 1957). “The United States Recession of 1953/54: A Comment”. The Economic Journal. Blackwell Publishing. 67 (266): 338–339. doi:10.2307/2227810. JSTOR 2227810.
  27. Holmans, A. E. (1958). “The Eisenhower Administration and the Recession, 1953–55”. Oxford Economic Papers. 10 (1): 34–54.
  28. Merrill, Karen R. (2007). The Oil Crisis of 1973–1974: A Brief History with Documents. Bedford/St. Martin’s. ISBN 0-312-40922-2.
  29. Knoop 2004, p. 163
  30. “The recession is a pretty picture”. BBC. August 27, 2009. Retrieved October 4, 2009.
  31. “Oil Squeeze”. TIME. February 5, 1979. Retrieved February 29, 2008.
  32. Rattner, Steven (January 5, 1981). “Federal Reserve sees little growth in ’81 with continued high rates”. New York Times. Archived from the original on July 16, 2012. Retrieved February 29, 2008.
  33. “NBER Business Cycle Dating Committee Determines that Recession Ended in March 1991”. NBER. Retrieved March 4, 2008.
  34. Carl E. Walsh (1993). “What Caused the 1990–1991 Recession” (PDF). Economic Review. Federal Reserve Bank of San Francisco (2).
  35. Knoop 2004, pp. 165–66
  36. “The Business-Cycle Peak of March 2001”. National Bureau of Economic Research. November 26, 2001.
  37. Kliesen, Kevin L. (2003). “The 2001 Recession: How Was It Different and What Developments May Have Caused It?” (PDF). Review. Federal Reserve Bank of St. Louis (September): 23–28. Archived from the original (PDF) on 2009-11-22.
  38. 2010 Business Cycle Dating Committee, September 2010, National Bureau of Economic Research. Retrieved on September 20, 2010.
  39. Stark, Betsy (9 March 2010). “Home> Money Tracking the Dow One Year After Rock Bottom”. ABC news. ABC news network. Retrieved 22 September 2013.
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