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):
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.
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