Since 1850, the U.S. has experienced a recession in every decade.
That illustrates two points:
(1) The current economic expansion has been extraordinary. It recently turned nine years old, making it the second-longest in history and just a year short of the all-time record.
(2) Historically, expansions don’t last forever.
The last recession ended in 2009. So is a recession inevitable between now and 2020? If so, what will happen to the stock market? Let’s attempt to answer those questions, first by taking a look at …
The History of Recessions in the U.S.
It’s commonly believed that a recession is defined as two consecutive quarters of declining gross domestic product (GDP). Although that’s definitely a sign of trouble, it’s not how a recession is designated. A recession has occurred only when the folks at the National Bureau of Economic Research (NBER) say so.
A private, nonprofit research organization made up of more than 1,400 business and economics professors, the NBER officially designates when recessions begin and end.
Here’s its definition of a recession: “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough.”
The group maintains information on past U.S. recessions, starting with the one that began in 1857.
The U.S. has experienced 33 recessions over this time period. On average, a recession occurs every 4.9 years and lasts 17.5 months. And … there’s been at least one recession in every decade.
Here are some of the more recent:
|| Trough Month
|| Duration in Months
|| July 1980
|| November 1982
|| March 1991
|| November 2001
|| June 2009
Will This Decade Be Different?
There’s a saying among economists: Expansions don’t die of old age. In other words, time alone doesn’t cause an economy to contract. A 2016 publication from the Federal Reserve of San Francisco seemed to confirm the adage. It found that, unlike humans — whose chances of dying increase with each year of living — the odds of a recession do not increase with each year of an expansion.
Do you know when Australia’s last recession ended? In 1991. If it can avoid a recession for almost three decades, why can’t the U.S.?
We might be tempted to predict when the next recession will occur or to pay heed to folks who are presumably able to do such things. A recent survey of economists by The Wall Street Journal found a “rough consensus” that we’re safe until 2020.
Unfortunately, history shows that even the experts aren’t successful at forecasting recessions. A study from the International Monetary Fund found that economists failed to predict 148 out of 153 recessions that occurred across the globe.
Some might say that the economy is humming along just fine, especially given the recent announcement that the economy grew 4.1% in the second quarter. Add to that the current (and very low) unemployment rate, and it certainly doesn’t feel like things are slowing down.
However, it’s important to remember that NBER’s definition of a recession includes that part about beginning “just after the economy reaches a peak of activity.” Good economic numbers are often the exuberance before the storm, especially if they’re lagging indicators. Take unemployment as an example; it’s often lowest right before an expansion stumbles. A recent Bloomberg article cited an analysis that found that of the 10 recessions since 1950, the average time between the low point in the unemployment rate and the start of a recession was just 3.8 months.
The bottom line: Age alone doesn’t mean a recession is imminent, but sanguine economic news doesn’t necessarily mean a slowdown is far off. We just don’t know when a recession will occur.
Slowdowns and Stocks
If and when the next recession occurs, what can you expect for your portfolio? History suggests that it won’t be pretty.
The following table comes from Doug Short at Advisor Perspectives, and it ranks all the recessions since 1929 according to the stock market’s valuation (to the degree it is above or below the long-term average valuation) in the month before the slowdown.
||Number of Months
||Market’s Average Valuation in the Month Before Recession, Deviation From Mean
||Market Price, Peak to Trough
||Change in GDP
Source: Advisor Perspectives
Generally speaking, the more overvalued the market, the more it declines during the recession. As Short wrote: “Of the nine market declines associated with recessions that started with valuations above the mean, the average decline was -42.8%. Of the four declines that began with valuations below the mean, the average was -19.9% (and that doesn’t factor in the 1945 outlier recession associated with a market gain).”
So where are we now?
According to the most recent numbers, the market is 103% above its mean valuation … just a bit below the most overvalued market in modern history.
The Bottom Line
History suggests that a recession is coming sooner rather than later and that when it does come, the stock market could get cut in half. But as Warren Buffett once said, “If past history was all that is needed to play the game of money, the richest people would be librarians.”
Could you wait out a 40% to 50% drop in your portfolio? If not, then it’s perfectly reasonable to seek out investments that are not correlated with the stock market. There are, also, investments that lock in gains and can never be lost. But otherwise, resist the temptation to make significant changes to your portfolio based on what might happen. Because there’s one bit of history that all should believe in, it’s that regardless of what happens to the economy, the stock market eventually recovers and reaches even higher values.
If you are young enough to wait out a recession and recover your losses well before retirement age, you should be OK. If you are close to retiring or already retired, you can’t chance a 40 to 50% drop in your investment values. If that’s you, call for an appointment to meet and review your options.