Are Recessions Really That Bad?

"Opportunities are never lost; someone will take the one you miss." (Author unknown)

In the 1926-1927 recession, the Dow roared from a low of 135 to a high of 200 towards the end of 1927, for a gain of 48%; more importantly though, it had recovered all its losses by the first quarter of 1927.

The Great Depression, which has come to be known as the mother of all financial disasters, lasted from 1930-1939, and the Dow shed almost 90% of its value; from a high of 381.17, it dropped as low as 41.22 before putting in a bottom. By 1934 it had gained about 120% from its lows, and by 1937, the Dow had recovered almost 60% of its losses. The situation was further exacerbated with very high interest rates and the Fed’s inability to act rapidly. This time around, the Feds have moved very rapidly to introduce liquidity into the system and dropped rates to historic lows, in an attempt to reduce the carnage. Note that we are not fans of the Federal Reserve, as they are the ones that helped fuel the current disaster in the first place.

In the short eight month recession of 1945, the markets gained roughly 19%.

In the one year depression from 1948-1949, the markets tacked on 15%.

During the oil crisis, which lasted from 1973-1974, the Dow corrected 50% (from 1060 to roughly 570), but by the end of 1975, it was down only 14% and by October 1976, it had virtually recovered all its losses. Many sectors actually started to rally well in advance of the general market, and by the time the Dow had recovered all its losses, many stocks in these sectors were showing gains of several hundred percentage points.

During the two year recession of 1980-1982, the Dow once again initially tanked and after putting in a low at roughly 770 in August 1982, it mounted a 37% rally (low to high) and by the end of 1982, the Dow had recovered completely, and was at a break even point. Once again, certain sectors diverged well in advance of the markets, and were most likely already showing gains in excess of several 100% by the time the Dow reached the break even point.

1990-1991; during this recession, the Dow corrected rather strongly, but by the end of 1992 it had recovered all its losses and then some; certain sectors were already showing huge gains well before the Dow and the general markets recovered all their losses. By the end of 1993 the Dow had gained roughly 26%.

The massive correction from 2000-2002 roughly wiped out over $5 trillion in market value and was arguably one of the worst modern financial disasters ever to hit the markets. Towards the end of 2002, the Dow had bottomed (7200) and by the end of 2003, it had recovered well over 90% of its value. The Dow then went on to mount a bull run that lasted over five years. Once again, several sectors roared to life well in advance of the markets. Examples of such sectors were oil, gas and precious metals; some stocks in these sectors were already showing gains of well over 100%, and by the time the Dow had recovered 90% of its losses, these stocks were already up several hundred percentage points.

The point is very clear here, that almost every single disaster has yielded tremendous opportunity for those who were able to take the long term view. Instead of selling everything and fleeing for the hills, investors should be buying and / or at the very least holding onto their positions; the time to sell is when others are singing and jumping with joy and the time to buy is when blood is freely flowing in the streets.

The second lesson here is that government officials and top analysts almost always acknowledge a recession when it’s almost over and as the markets are forward looking, they usually mount a rally shortly after this admission. The current recession will probably take a path that will be a mixture of the Great Depression and the recession of 2000-2002. It will not be as severe as the Great Depression because of the following reasons;

1. Interest rates have been lowered to almost zero, where as before they were raising rates.
2. The Feds are aggressively lending to financial institutions, where as before they were shying away from doing.
3. And finally, we now have a global economy.

This does not imply that that we are fully out of the woods and that the markets are simply going to roar upwards from these levels; it does, however, imply that stocks are selling at prices that may never be seen again for decades. The early bird gets the worm; the late bird only gets the germs. Investors should not let fear overwhelm them; fear and euphoria play nasty tricks on one’s mind; opportunity is made to look like a disaster and disaster looks like opportunity. We still believe that the current economic situation will worsen before it gets better, but if you wait till the majority deem that it is safe to venture forth and purchase stocks, the train will have left the station, and you will be left holding a worthless ticket.

The following stocks and or ETFs, in our opinion, make for good long term investments.

click to enlarge image

"The one permanent emotion of the inferior man is fear - fear of the unknown, the complex, the inexplicable. What he wants above everything else is safety." (Henry Louis Mencken)

Comments

[prudentinve...:]

I agree that recessions are buying opportunities for stocks that have been artificially depressed to below their intrinsic values. Problem is that intrinsic value is subjective, and reasonable people will have different opinions.

Another problem is that the vast number of people whose livlihood depends on the public always buying stocks and mutual funds act as salesmen for the market, frequently under the guise of objective research. This slants stock valuations and tends to push them above their intrinsic value based on the company's long-term cash flow and dividend yield. Recent history is full of examples of stocks that were touted as excellent values by "the smartest people on the planet", only to fall back to their intrinsic value, which is frequently a modest fraction of what the misguided public paid for them. I am sure you remember JDSU, CMGI, INTC (great company, but not at $80), CSCO (another great company, but not at $75) and the list goes on.

The mere fact that a stock has fallen considerably does not in itself make it a good value. It may just be a manifestation of something that came down from an extreme overvaluation to a more modest overvaluation. At the present, I see a great many stocks that are still quite overvalued, despite their fall. Buying them now will be just like buying INTC at $40 in 2001 just because it had just fallen from $80.

(disclosure: Long-term, buy-and-hold investor in INTC, all entry points in the low and mid teens).

Jan 07 10:49 AM

[Moon Kil Woong:]

If depressions are such a great buying opportunity I guess we should be hopeful for a depression. Mild recessions are only good because they tend to bring to light the excesses of a up market and bridles the level and extent of corruption. Clearly we needed a recession because corruption apparently has been very unbridled.

Personally I'm sick of traders claiming recessions are great because you get to buy cheap. Really, you got to ask sometimes, do they have a conscience? When the bricks start flying through their windows will they still think it's suck a great thing.

Jan 07 12:08 PM

[Roger Knights:]

The author MAY be right. But there is a "half-empty" way of interpreting this statement:

"stocks are selling at prices that may never be seen again for decades."

And this one:

"The early bird gets the worm."
(And the early worm gets the bird.)

Jan 07 06:13 PM

[whidbey:]

One might also say - not all recessions are alike. This one is global and it has the potential of dragging many more consumers into its maul. The distinguishing features of large scale recessions is that it takes so much more energy and coordination to lift the consumers out and put them into the markets again. This investment in recovery has to be very large and it is typically not well distributed within trade areas so the recovery takes longer. One must suspect that the shear scope and time required to move ahead once again will be great and that the process will realign the world from commodity regions into military/political regions. I suspect that the business opportunities will be great, but not necessarily stabilizing. We will be a different world.

Jan 07 06:30 PM

[doc_hawkins:]

Not to criticize the data or your analysis but the research. The data is what it is.

Recessions may be good for Wall Street in cleaning out the clutter and if you buy around the bottom. (Those who bought on 21NOV are dancing now)

However Recessions are terrible for main street. I had a home foreclosed during the 80s and the Midwest the recession was much longer and sharper than the rest of the country. I saw hordes of familys voting with their feet as Regan put it and that is a difficult vote.

However no one is promised an easy life and those who get one never accumulate the experience and wisdom for future opportunities.

Jan 08 09:06 AM

[birder:]

This article is just slightly slanted in its approach. From 1968 to 1982 the annual growth rate of stock investments as given by the S&P 500 was about 2.4%--not all that spectacular. That was a 14 year period of next to nothing. We are probably in for another such period, if in fact it proves that good.

Jan 18 03:41 PM

[Jose D. Roncal:]

All eyes are on the current recession, but we tend to overlook the many U.S. recessions we've survived since the Great Depression. They’ve varied in length and severity and each had a slightly different cause and impact on the gross domestic product (GDP). But they've have also had similarities.

First, let's look at the defined differences between a depression and a recession. The definition of a recession is a decline in a country's GDP, or negative real economic growth, for two or more successive quarters of a year. In 2007, an economist at the Federal Reserve Board suggested that a combination of GDP and gross domestic income (GDI) may be more accurate in predicting and defining a recession.

A depression refers to a sustained downturn in one or more national economies. It is more severe than a recession (which is seen as a normal downturn in the business cycle).

The Great Depression from 1929 to late 1930s was marked by a stock market crash and a banking system collapse that sparked a global downturn, including a second but relatively minor downturn in 1937. This is where we'll begin listing a few key points about past recessions.

May 1937 - mid 1938: Roosevelt Recession
GDP declined by 3.4% and more than 4 million were unemployed (19.1%).
The stock market crashed in late 1937, an event that big business blamed on Roosevelt's "New Deal." The new Social Security Insurance program caused $2 billion to be held in a Federal trust fund, which meant vast sums of money were pulled out of circulation.

February 1945 - October 1945: Union Recession
GDP declined by11% and unemployment was a moderate 1.9%.
As WWII wound down, there was a slow transition period between ending war-related manufacturing and ramping up the civilian job market. Unions were pushing for higher wages and credit was hard to come by.

November 1948 - October 1949: Post-War Recession
GDP declined by 1.1% and unemployment rose slightly to 5.9%.
Large numbers of war veterans re-entered the workforce displacing civilian workers and causing unemployment to rise. There was more concern over inflation than unemployment, so there was very little government intervention.

July 1953 - May 1954: Post-Korean War Recession
GDP declined by 2.2% and the unemployment rate was at 2.9, the lowest since WWII.
At the end of the Korean War, more dollars earmarked for national security. The Feds tightened money to curb inflation, which boosted interest rates causing a lack in consumer confidence and decreased product demand.

August 1957 - April 1958: Eisenhower Recession
GDP decline by 3.3% and unemployment was up to 6.2%.
The tighter monetary policy was supposed to curb inflation, but prices continued to rise. A world-wide recession and a strong U.S. dollar created a foreign trade deficit.

November 1973 - March 1975: Oil Crisis Recession
GDP declined by 3.6% and unemployment rose to 8.8%.
This long and deep recession was triggered by steep oil prices and the high cost of the Vietnam War creating "stagflation" and unemployment to reach 9% by May of 1975.

January 1980 - July 1980: Energy Crisis Recession
GDP declined by 1.1% and unemployment was at 7.8%.
Inflation rose to 13.5% and the Feds boosted interest rates and slowed the money supply growth. This caused a further slowing of the economy and a rise in unemployment. Since energy prices were high and supply low, consumer confidence took another hit.

July 1981 - November 1982: Iran/Energy Crisis Recession
GDP declined by 3.6% and unemployment hit 10.8%.
The recession was caused by Iran's revolution, which forced oil prices higher. The Feds tried to control inflation with tighter monetary policies. The prime rate reached 21.5% in 1982.

July 1990 - March 1991: Gulf War Recession
GDP declined by 1.5% while unemployment was at 6.8%.
Iraq invaded Kuwait causing another spike in oil prices. The North American Free Trade Agreement (NAFTA) kicked in causing some manufacturing to be moved offshore. The leveraged buyout of United Airlines set off a short-term stock market crash.

March 2001 - November 2001: 9/11 Recession
GDP declined by a mere 0.3 and the unemployment rate was at 5.5%.
This was a relatively mild recession considering the dramatic events of the period including the collapse of the dotcom bubble, the 9/11 attacks and a series of accounting scandals like Enron and other major U.S. corporations.

Current Recession
That brings us up to the current crisis caused by the collapse of the housing market, the collapse of the banking industry in the US and Europe, and a credit crunch that furthered the economic melt down.

The current recession, officially announced on December 1, 2008, fits the pattern of recent ones—but is likely to last longer than any other post-war downturn.
The unemployment rate as of January 2009 is 7.2%, a 16-year high. More than 2.6 million jobs were lost in 2008. Absent an economic booster shot, the U.S. economy is likely to lose another 2.4 to 2.8 million jobs in 2009, which would push the national unemployment rate above 9%.

This comment was posted by Jose Roncal, co-author of "The Big Gamble: Are You Investing or Speculating?" - For more information, visit financialspeculation.c...

Jan 29 03:17 PM