Chart of the Week - Historical Length of Recessions

[arbitragr]

 

While the stock market has rallied nicely since bottoming on March 9th, the economy continues to struggle. For some perspective on the current economic recession, today's chart illustrates the duration of all US recessions since 1900. As today's chart illustrates, the five longest recessions all began prior to 1930. The length of the current recession (now entering its 16th month) is above average and equal to the longest recessions (1973 & 1981) since the Great Depression.

 

http://i163.photobucket.com/albums/t314/ripleyx/Finance/ChartoftheWeek-4thApril.jpg

[Partner24]

Very interesting chart!

 

Thank you arbitragr.

 

Cheers!

[ECCO]

Everybody seems to agree now that this recession is something "different", something like a 1 in 100 years events. Can we expect then that the lenght of it can also be a 1 in 100 years event?

 

That being said, a 30 months (or more) recession become a high possibility event.

 

 

ECCO

[ubuy2wron]

Ecco, "this time is different "are the most expensive words in the English language after "I love you"

I have read more times than I can count phrases which reflect the this time is different position . Yes it is true that many things are different from past economic retractions however so have policy makers responses. Being able to anticipate changes in important trends appears to me to be one of the critical factors which differentiates the truely great investor from the good to mediocre investor. Prems ability to see the excess in the credit markets and invest and speculate profitably is a great recent example of this.

Making major investment decisions on the basis of general levels economic activity seems to me to be overall a waste of time. There are very few rich economists. Roubini ? makes his living teaching selling books and giving speaches .

[ubuy2wron]

Ecco also the phrase everyone seems to agree makes me think you are perhaps missing something of major significance ,consensus opinions are comfortable ones ',they merely reflect the majority they rarely are a source of excess returns. Excess returns are made when every one runs to one side of the boat and you do not.

[benhacker]

I remember when I finally convinced myself that GDP growth is not at all correlated with stock market returns that my investment life was simplified quite a bit.

 

Grantham understands this, Buffett understands this, but it appears to be a fallacy on the surface to most people.  It surprises me how many experienced investors and economists don't understand this very fundamental concept.

 

Great chart.

 

Ben

[Guest kawikaho]

The reason why it's NOT correlated is because it takes forever for the NBER to announce the start of the recession.  But, recessions and stock markets are definitely correlated. 

[Uccmal]

The reason why it's NOT correlated is because it takes forever for the NBER to announce the start of the recession.  But, recessions and stock markets are definitely correlated. 

 

I was trying to find a chart that shows market action versus recessions for the last 109 years.  CalculatedRisk put it up but I cant find it.  The graph shows quite clearly that markets precede recessions and recoveries, in nearly every case.  The US recession supposedly started at the start of 2008, was announced six months after the fact, while the market peaked in July 07, dropped of alot, and peaked again in October 07.  The hallmark of a recession is a shrinking economy ( I hate the term negative growth - double speak).  So, we can expect the recession to get slightly worse over the next few months, and then economic growth will begin to resume.  The growth of course will resume from a lower point. 

 

A bull market occurs when the stocks exceed the previous high (S&P 1562) which may be years off.  That has no relevance to an investor who wishes to make money.  In fact, I find that bull markets are by far the hardest to invest in.  Until we surpass S&P 1562 we are having bear market rallies, which is what this is.  So buy alot and hold on for dear life, or buy alot and sell on the upswings, or buy alot and hedge your downside (what I have done - this time).  No matter which way you do it you will outperform 98% of investors.  The rest will be waiting for the unmistakable signal that markets have returned which will be 3 to 10 years out.  They will catch the last 30% before the next bear and then lose it all during the bear.  And so history repeats itself. 

[ECCO]

ubuy2wron

 

" "this time is different "are the most expensive words in the English language after "I love you""  I like this one. :)

 

"consensus opinions are comfortable ones ',they merely reflect the majority they rarely are a source of excess returns. Excess returns are made when every one runs to one side of the boat and you do not."

 

Totally agree with you.

 

Making major investment decisions on the basis of general levels economic activity seems to me to be overall a waste of time. There are very few rich economists.

 

Ok, I never said you should not invest now cause recession might still be there for a year or more. Im invested 95% right now. What I said and what I think is that if something big happened, then consequences are usually big. I then expect this recession to be longer than the average recession.

 

But whatever if recession is still there or not, today might be a good time to invest in some business. I dont care about economics.

 

Analysts, economists are just there to distract us from the real thing: management.

 

If you buy the market you should tried (good luck) to predict economics cause it is correlated, but if you buy individual stock you should care about management, the business itself and the price you pay. I think that, for many stocks, the price right now is still very good whatever recession is there or not.

 

 

ECCO

 

 

 

[scorpioncapital]

Seems that according to the chart, the longer recessions happened earlier in the century and the shorter ones closer to the present. Are we getting better at reducing the length and impact of recessions?

[uncommonprofits]

Seems that according to the chart, the longer recessions happened earlier in the century and the shorter ones closer to the present. Are we getting better at reducing the length and impact of recessions?

 

Since the Great depression --- we have purposely chose the path of inflation.  Prior to the 30's, there were spikes of inflation that were typically offset by deflation --- but the end sum was pretty much zero -- Gross GDP more or less equalled Real GDP.  While we have had varying degrees (including spikes) of inflation over the last 7 or 8 decades --- the dominant theme has definitely been inflationary with little (if any) deflation. 

 

The gold bugs point out all the diminishing dollar effect that inflation causes ..... and there is no question of this.  But as a system that encourages people/business to come out of their caves and spend in a quicker manner than they might have otherwise --- it does seem like the better evil than the system that existed in the pre-30's era.

 

So are we getting better at reducing the length/impact of recessions?  OR --- are we getting better at managing inflation?  Check back in 5 or 10 years when consumer prices have increased by 50% or more.  Today's short-time solution may well become a longer-time problem -- but that's the system.

 

UCP / DD

[arbitragr]

I remember when I finally convinced myself that GDP growth is not at all correlated with stock market returns that my investment life was simplified quite a bit.

 

Grantham understands this, Buffett understands this, but it appears to be a fallacy on the surface to most people.  It surprises me how many experienced investors and economists don't understand this very fundamental concept.

 

Great chart.

 

Ben

 

"In our view, though, investment students need only two well-taught courses—How to Value a Business, and ... How to Think About Market Prices."

~ WEB

 

Simple enough is the former, but it is the latter that Warren has done well with throughout his career, although "on the surface it appears to be a fallacy", it's just an exercise (or tool) to judge the level of those market prices. Same goes with last week's chart of historical P/E ratios adjusted for inflation.

 

In other words, what that chart says to me (and I'm not sure what it says to others, apparently it says "GDP growth") is that now is the time to invest.

 

 

 

 

[SharperDingaan]

 

Ubuy2wron, Ecco

 

You may wish to look at the Berkshire Hathaway 'pullback' thread

 

SD

[benhacker]

I think stocks react VERY strongly to the difference between GDP growth and the EXPECTATION of GDP growth.  I do not think stock perform better with higher GDP growth.  A simple perusal of various emerging economies over the years with high growth compared to Europe would be telling.

 

To the discussion of stock performing strongly right before the recession ends, it is simply (to me) a matter of psychological fact that when everyone is expecting (and pricing in) a -1% GDP figure and they get a +1% GDP figure then good things happen for stock investors.

 

But don't confuse 'better than expected' with 'high growth = high stock returns' as it may happen, but is not at all guaranteed.

 

My 2 cents,

 

Ben

[vinod1]

One of my favorite investment books is Triumph of the Optimists: 101 Years of Global Investment Returns. The authors did a truly outstanding study of returns from 16 countries for the years 1900-2001 and it gives a lot of food for thought. The data shows, for example, that economic growth rate is weakly negatively correlated with stock market returns. The faster the economic growth, the poorer the stock market returns. This is pretty much supports what Benhacker says above.

 

The best predictor for stock market returns is the starting dividend yield - in other words, valuation. This admittedly crude measure of valuation is in fact the best predictor of the measures studied.

 

An academic paper that deals with this exclusively is Jay Ritter's "Economic Growth and Equity Returns" for anyone interested in this.

 

Vinod