A Review of Past Economic Downturns
After watching the recent market news, many wonder if we'll ever see the market come back to pre-recession levels again. For many investors with less experience in the market, or investors who came of age during the boom years of the 1990s, this kind of recent market turbulence seems very foreign and unknown.
But for veteran investors who have seen the market over the past few decades, this is nothing new. There have been several notable downturns in recent history -- since the end of World War II -- that suggest we're still in charted waters and that the seas will eventually calm.
Classically speaking, the word "recession" is not synonymous with "downturn." A legitimate downturn could result from a slowdown in the rate of growth instead of an outright contraction in the gross domestic product. A recession doesn't occur until the economy has experienced negative growth for two consecutive quarters, or six months.
However, the use of the r-word has evolved, and the National Bureau of Economic Research Dating Committee -- which decides the beginning and end of these things -- says a recession is a significant decline in economic activity that lasts more than a few months.
Let's look at the nation's past recessions and how the data played out through various economic indicators.
The Post-War Recession lasted from November 1948 to October 1949. GDP growth fell -5.8% in the first quarter of 1948 and -1.2% in the second, then dropped -4% in the fourth quarter of 1949 before going on a three-year run.
Troops returning from the war re-entered the workforce and began to compete for jobs, doubling the unemployment from 3.8% at the onset of the recession to a high of 7.9% in October, when the downturn ended. It took two years for the jobs picture to return to its pre-recession levels. The S&P 500 gave up -6.7% from November to October.
The Post-Korea Recession began in July 1953 and held for 10 months, until May 1954. Higher interest rates introduced to check inflation in 1952 rippled through the economy and slowed expansion.
At the beginning of the recession, joblessness was at an impressive 2.6%. In April and May 1954, however, unemployment had shot up to 5.9%. GDP fell for three consecutive quarters, but the broader economic concerns were less evident in the stock market, where the S&P gained more than 20%.
The Eisenhower Recession was caused when the Federal Reserve increased rates to fight inflation, but prices continued to rise. A strong dollar limited the ability to increase trade through exports. The post-war boom lost some steam and the world entered a global recession that, in the United States, only lasted for eight months, from August 1957 to April 1958. GDP fell as astonishing -10.4% in 2Q 1958 and unemployment rose from 4.1% to 7.4% -- and did not drop back to 4.1% until November 1965.
Low priced foreign cars and other shifts in U.S. industry led to a drop in GDP that lasted from April 1960 to February 1961. The early months of the recession -- sometimes called the "rolling adjustment" -- saw only a gradual uptick in unemployment; though by February it had increased to 6.9%, hovering for six months. GDP fell by -5.1% in the fourth quarter of 1960 amid the presidential election. In January, President Kennedy called for additional government spending and the recession ended the following month. GDP would grow until the last month of decade.
After the tumult of 1968, Richard Nixon was sworn in as the nation's new president and was immediately confronted, in addition to international concerns, with a recession at home. The Nixon Recession, sparked by inflation and tight monetary policy, began in December 1969 and lingered for nearly a year until November 1970. The decline in GDP was modest and unemployment did not spike as it had in previous downturns. The S&P, however, lost -8.4% in 1969 and managed only a 4% gain the next year.
If the Nixon Recession was light, the economic woes that came on the heels of his resignation were far heavier. Oil prices doubled, then doubled again. The U.S. had committed vast sums to waging war in Vietnam. The result: Inflation, low or no growth and unemployment. The pain officially dragged on from November 1973 until March 1975 -- the first post-war downturn to consume an entire calendar year. Investors who put $1000 into the S&P on Jan. 1, 1973 had only $604.74 by the end of 1974.
The thing that is most shocking as we look back on the Energy Crisis Recession (January 1980 to July 1980) is the heights interest rates reached. GDP fell -7.8% in the second quarter of 1980. Joblessness rose and stayed put for most of the decade, hovering at between 7 and 10% until the 1990s were in sight. For investors, however, 1980 was a banner year, as the S&P gained +32.3%.
The benchmark federal funds rate was 10% in January 1979 and at 13.8% a year later. By January 1981, the rate had risen to 19%. By July, the economy had again fallen into recession, and things got nasty.
The shah of Iran went into exile, roiling worldwide petroleum markets. Interest rates were sky-high and wouldn't drop back to the single digits until the month before the recession ended in November 1982. Joblessness stayed above 10% for nine months. GDP slipped 5% in the second of 1981 and then another 6.4% the following quarter. For all the difficulty, however, the S&P stayed strong except for '82, when it fell -5%, though it rallied more than +20% for the next two years and didn't post a loss until 1990.
After the go-go 1980s, it seemed like nothing could stop the U.S. economy. But there is one thing that did it: Oil, which surged in price after Saddam Hussein invaded Kuwait. The Gulf War Recession lasted from July 1990 and March 1991 and coincided with the implementation of the North American Free Trade Agreement, which moved manufacturing jobs abroad. A leveraged buyout of United Airlines sparked a panic. In all, it was more a reality check than a serious correction: The S&P posted a modest 3.1%, growth moderated then contracted slightly, and unemployment numbers were far better than they had been for most of the 1980s.
The Early 2000s
On a beautiful September morning, a cadre of terrorists hijacked three U.S. airlines. By the end of the day, thousands of people were dead and the nation found itself absolutely stunned. Though the visual is intense, the economic effects were fairly mild. The downturn lasted from March 2001 until November, though unemployment was light and the decrease in GDP was far more measured than in previous recessions. The bad news, however, finally reached investors, who suffered through three consecutive years of decline in the S&P 500.
The Investing Answer: Market downturns and recessions occur nearly every decade. Even though the recent down trends have made the market look like a bad place to hold your hard earned money, history has shown that the market will come back eventually, every time.
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