When Will The U.S. Have Its Next Recession?

From 1836-1928 the U.S. averaged a recession every 2.1 years. This included seven depressions (they were actually called panics back then) that led to an average contraction of 29% in business activity. Part of this had to do with the fact that the U.S. was on the gold standard at the time, but it’s also true that the U.S. was once an emerging market.

Following the Great Depression, the U.S. hasn’t experienced that type of business contraction since. Although it was the worst recession in the post-WWII period, even the Great Recession was relatively mild compared to the panics and depressions from the 19th and early 20th centuries. Here is a list of every recession since the Great Depression began in 1929 (click to enlarge):

Recessions Historical

You can see that roughly every four years the U.S. has entered a recession. Even though they’ve been more spread out after WWII, recessions have still occurred once every five years or so since then. The longest period of calm in the economic cycle was during the 1990s when the economy went a full decade without a down cycle. It’s been just shy of six years since the last recession technically ended, so it makes sense to consider when we’ll see the next one.

Recessions don’t necessarily follow a set schedule, but you can be sure that the business cycle will rear its ugly head eventually. And just like stock bear markets, most investors will be shocked every time the next downturn hits.

I caught the highlights of the Daytona 500 last week on SportsCenter and the analysts said the drivers make somewhere between 5-8 pit stops over the course of the 200 laps in the 500 mile race. I thought that pit stops were an apt analogy here. NASCAR drivers can’t push their cars to the extreme for the duration of the race without taking a break. They need to stop and fill up their gas tanks, change their tires and make other adjustments.

Economies need recessions to take a breather every few years, as well. Growth can’t continue uninterrupted forever. Although they’re painful, recessions are needed to weed out the strong companies from the weak, as many companies go out of business during the downturns and new ones emerge.

Many great companies were formed during the depths of economic contractions as they force people to innovate. Fortune magazine was formed ninety days after the 1929 market crash. Walt Disney was another company formed during the Great Depression. The first Charles Schwab branch opened in 1975 following the sever bear market in 1973-74. UPS was founded during the Panic of 1907. General Motors came along the following year. I could go on.

The current recovery has been fairly slow so it’s likely the expansion still has a few years left to run. It’s possible we won’t see another recession until somewhere in the 2017-2020 time frame. That would put the current recovery in the eight to eleven year duration. With the Great Recession in our recent memory, many are concerned that every future recession will be a similar calamity. That’s highly unlikely as future cycles are never quite the same as past cycles.

One of the things I find most interesting about the prospect of the next recession is the question of the Fed’s policy toolkit when it finally does happen. Will we go into the next recession with loose monetary policies still in place?

Either way, the experts are highly unlikely to provide advanced warning on when the next one will begin. A group of well-known economists for the Survey of Professional Forecasters assigned just a 3% chance of the economy shrinking by any margin in 2008. And they placed only a 1-in-500 chance of the economy shrinking by at least 2%, which of course it did.

Investors have to understand that recessions are an unavoidable fact of life. But they also provide investors with lower prices to buy stocks. So while they’re painful in the short-term, if you have the guts and capital to make purchases, recessions can offer some of the best buying opportunities in the long-term.

Further Reading:
Do We Need a Recession for a Meaningful Correction in Stocks?
The Origins of Economic Terminology

Now here’s what I’ve been reading lately:

  • Tom Brakke: “…altered narratives may make us feel better about ourselves, they inhibit our ability to see the world clearly.” (Research Puzzle)
  • Josh Brown on scarcity and why time is such an undervalued commodity (Reformed Broker)
  • The problem with 3 year performance numbers (Dual Momentum)
  • Why don’t we make good investment decisions? (Irrelevant Investor)
  • Avoid extreme advice at all costs (Prag Cap)
  • Why investing can be so confusing: Weak earnings growth but strong stock market returns (Avondale)
  • Winning by not losing (Gestaltu)
  • Mistakes that trip up investors (WSJ)
  • A little humility goes a long way (Abnormal Returns)
  • Podcast: Meb Faber talks asset allocation with James Osborne (Bason)

Subscribe to receive email updates and my monthly newsletter by clicking here.

Follow me on Twitter: @awealthofcs


Share Button

From Great to Good

As I’ve said before, I think Cliff Asness is one of the most interesting characters in the investment management business because he has a great combination of intelligence and humor about the financial markets. So I was glad to hear he was going to be interviewed by Barry Ritholtz for the latest Bloomberg Masters of Business podcast series. Continue reading

Share Button

Long-Term Thinking as a Contrarian Approach

One of the most interesting pieces I’ve come across lately deals with an investment firm that’s been managing the pension plan for Tampa’s police and firefighters for over 40 years. There’s a soap opera brewing between the investment firm, Bowen, Hanes, and a consulting firm that doesn’t agree with the way they do things from an operational standpoint. Continue reading

Share Button

The Most Impressive Behavior Gap in the Mutual Fund Industry

I spend a lot of my time writing about the common mistakes made by investors because I operate under the assumption that cutting down on unforced errors could drastically improve portfolio performance for the majority of investors. Continue reading

Share Button

Observations From a Decade in the Investment Business

It was recently brought to my attention that it’s been ten years now since I started my first full-time job in the investment industry. More experienced investors might not think this is a very long time, but it feels like an eternity to me considering my current level of understanding compared to what I knew when I first started out. Continue reading

Share Button

Why Should You Care What Anyone Else Does With Their Finances?

The New York Magazine profiled popular blogger Mr. Money Mustache, who is very well known for his frugal ways and the fact that his extremely high savings rate allowed him to retire at the tender age of 30. Continue reading

Share Button

Risk Management Always Matters

Many of the most intelligent investment thinkers out there today are in agreement that future returns for U.S. stocks and bonds will be subpar. This has been pointed out by many for a number of years now, but eventually it will happen. Continue reading

Share Button

How Our Memories Shape Market Cycles

Mark Andreessen laid out some interesting theories on Twitter earlier this week about market cycles: Continue reading

Share Button

Which Investment Generalizations Should You Treat as Fact?

People always say that investing is more of an art than a science. This is true because there’s always an exception to every rule. Caveats abound when dealing with such a small sample size in a complex adaptive system such as the financial markets. So instead of concrete truths, investors are forced to deal in generalizations. Here are some popular ones along with the caveats: Continue reading

Share Button

The Problem With Intuitive Investing

“Hundreds of studies have shown that wherever we have sufficient information to build a model, it will perform better than most people.” – Daniel Kahneman

Continue reading

Share Button