1990 All Over Again?

In the aftermath of the crisis in the credit markets, many economists have said that the US economy is facing the worst recession in the post WWII area. While the ultimate outcome of the current period is anyone's guess (many are now doubting we will even end up with a recession), we wondered whether investors and economists tend to think every recession (or even period of economic weakness) is the worst ever as they are going through it, and then once it's over say, "Oh that wasn't so bad after all."

For example, the 1990 recession is considered by most to have been pretty mild. But at the time, people thought it was a lot worse. For example, in February 1992 - almost a year after the recession ended - US News and World Report said that,

The current downturn is different. Many cash-strapped homeowners whose houses have fallen in value won't be able to take advantage of the refinancing bonanza promised by the Fed's rate cut. So far, unemployment remains lower than it was a decade ago, but this recession isn't over yet, and the economy's glaring structural problems will stifle growth and new jobs.

US News went on to say that the recession would be "unlike any the country has experienced in the post-World War II era, the result of years of profligacy and irresponsible government policies." Sound familiar? For those interested, we highly recommend reading the entire article to see just how negative sentiment was leading up to one of the greatest decades of growth in American history.

In fact, if we were to compare the 1990 period to today, there are many similarities. As just an example, in each period, the dollar was weak, inflation was on the high side, oil spiked, and credit markets were under stress. In both periods there was even a George Bush in the White House! With these similarities, it comes as little surprise that the performance of the stock market has been similar during both periods.

In the chart below, we overlaid the S&P 500 in the current period (since October 2007) with the period from June 1990 through June 1991. As the patterns show, for the last six months, the two periods have tracked each other closely. While this is not meant to imply that the S&P 500 is poised for a monster rally, the correlation between both periods is certainly worth noting.

click to enlarge

Comments

[bds231]

Good observation. It would be doubly interesting to see what the prevailing opinion would be during "bad" recessions...

[zenalgorithm]

One factor to consider: erase $2 trillion in homeowner equity this time around...

[Nidhi]

Should we see a temporary dip in June this time before it rallies again? Thanks for putting the chart together.

[Wez]

Don't forget the $1 trillion dollar war....oh, never mind that helps our economy.

[Lilguy]

The fact that two lines seem to move in a similar way tells me nothing about the underlying causes and effects.

This is not just bad market analysis, it's bad history.

[StupidityAndGreed]

The greed, as people people smack their lips and wring their hands in anticipation of the next "house of cards" bull market, is palpable. You've got to admire the sheer magnitude of feat as CNBC (and others) parade an never ending stream of "experts" claiming that the credit crunch is over and the economy is ready to turn. It's pump and dump on a GRAND scale.
My only problem is that, when this all comes home to roost and there is no longer any way to "spin" the facts, EVERYONE in the world will get dragged down by the greed and corruption of truth, rampant in the US.

[H-Bomb]

I wonder about all of you doom and gloomers. You are so quick to lament at how horrible things are and how the end is neigh. What end? Do you really think there will be bread lines? If summer wasn't almost here, I think some of you might consider burning money for warmth. Do something constructive and jump already.

[Ex15:26]

H-Bomb,
They characterized Noah the way you characterize folks that have a glass half full view of our economy. Just because they aren't nuts like GWB suggesting that the economy is getting better doesn't mean that they are proclaiming the end of the world. Why not make money when everything else is losing value (real estate, banks, equities) and everything else is costing a lot more (groceries and fuel)----oh, I'm sorry, enery didn't go up any when seasonally adjusted by the great folks in the government..... right, gas is up 100% Y-O-Y yet inflation is up only modestly at .2%.

Get short, you might be happier.

[buyitcheap]

1990 was a great time to be looking at real estate, but an oil downturn if I recall was just around the corner, and around 1992 a guy named Sam Zell bought $300 mil of commercial real estate from the RTC for about $20 mil and that became a $15 odd billion fortune just 14 years later.
This could be a great time to scale into REITS and commercial property in the right sectors.

[jcrash]

Ex15, Noah was ONE guy amongst all the others...you doom and gloomers are a dime a dozen. Don't try to make yourself into some type of saint or martyr or Nostradomus. YOU are the crowd. I remember some guy posting on here back in August how he had taken all his money out of the market. S&P was at 1400...guess what? S&P is at 1400 now...and it will probably be higher before that guy realizes he missed the bottom and found out you cannot time the market.

[noguru]

Nice chart comparison. I believe we will close the year higher. I just wonder how much lower before the long long climb up. You must remember when the going gets tough .... the rules change (just ask the Fed about the bailout). We still live in a country where 94.8% of people who want a job have one. Its not all doom and gloom. I will be a buyer within the next two months. These will hopefully be viewed as good times to have bought. As commodities fall the markets will go up.

[bearfund]

The "doom and gloom" is merely a recognition of the facts on the ground. Assertions to the contrary, bullishness is irrational. You bulls have the printing presses on your side and all the fabricated government data you could ask for. Is this finally the time you're wrong and the whole rotten corpse collapses on itself? Maybe, maybe not. But the longer you put it off, the worse it's going to be.

[Ex15:26]

Hey, I'm not saying that in 6 months we might have a rebound, I'm just going to make a bunch more money than the shepeople and the CNBC crowd that think every day, month, or 1/2 year is going parabolic up.

[User 143167]

It all depends on how long can US citizens keep spending beyond their means. If it is 1990 again, you are talking about another 20 years of irresponsible way of living based on credit bubble 10x bigger than today.

[DanielJacome]

Barton Biggs is optimistic and he's got a good track record and isn't scared to go contrarian when it counts. We're with him.

[gfsound]

Wow- just keep drinking the Kool-Aid, bulls. Have you thought about national debt differences between 1990 and 2008? $3.2 Trillion versus 9+? Current account deficit now versus 1990 (which, mind you, even congress labeled as "unsustainable&qu... in a CRS report from 2005)? How about the emergence of BRIC and the increased demand for resources? How about the UN and the Bank of International Settlements (BIS) that warn of a "dollar collapse" and "global depression?" I suppose they are just "doom and gloomers" too, right? Oh wait, the bulls must ALSO throw the likes of George Soros, Jim Rogers, and David Walker, the former comptroller general of the United States into our crowd- well, I like that company. I personally will be listening to these astute investors rather than a couple of bulls posting here that have made a few bucks off Google and are now the self- proclaimed "experts" on the US economy. Amazing that watching our currency, the worlds reserve currency, lose nearly 40% of its value over the past 5 years hasn't daunted the bulls enthusiasm for overvalued fiat currency fueled equities that derive value from a US economy based on consumption (over 70% of GDP). It is this very attitude of "it'll never go down" and sense of entitlement that will bring about the demise of the American empire. It's already started happening- open your eyes.

[huskerbob]

The last commentor makes a lot of sense. If this is 1990 again, where will all the borrowed money that fueled the bubble come from, and who will borrow it? Even if the mountain of debt is piled higher, pushing the market up with it, what will happen when that bubble pops? We need a serious correction to weed out the chaff, and that hasn't happened yet. There hasn't yet been a huge downturn in investor sentiment, and P/E ratios are still well above historic levels. That's not gloom and doom, that's simple observation.

[DaveinHackensack]

Buyitcheap introduces the elephant in the room: the big downturn in oil prices following the quick conclusion of the Gulf War in early 1991. Some handy charts to illustrate this here: www.wtrg.com/prices.ht...

[Brendan]

You do realize one obvious difference here is that we don't have Bill Clinton to repair the economy this time around.

[H-Bomb]

My point was not necessarily "bullish". I'm just tired of "the sky is falling". The system is broken, I agree. But what are some of us accomplishing by bringing up the depression? Do you know anyone who has stocked up on food, bought a gun and put all their money into gold?

[Balsamo]

Well at least one thing is different...
check this out

research.stlouisfed.or...

research.stlouisfed.or...

[gfsound]

H-Bomb- you say in your post to "do something already." I can't speak for anyone else, but personally I HAVE been buying gold and silver since 2003, junior mining stocks, commodity funds, foreign currencies, etc. And yes, I actually DO have food stocked, quite frankly.

Talk about the REAL elephant in the room- Balsamo just nailed it. Thanks for posting those- I've seen them before and they are staggering.

Final caveat: I truly, honestly hope you are right H-bomb; I've been saying that all along as I've ridden the dollar all the way down, and gold and Euro's all the way up. However, overwhelming evidence to the contrary has given me no reason to expect anything other than exactly what has happened so far. If you'd like to present evidence to the contrary, such as the author did, I'd be more than happy to entertain it. But saying "do something constructive and jump" doesn't add anything or address any of the fundamental issues we're discussing here.

[stockczar]

US manufacturing economy stalling per today's news. "Manufacturing activity in the New York area deteriorated slightly in May, the New York Federal Reserve Bank said Thursday. The bank's Empire State Manufacturing index fell to negative 3.2 in May from 0.6 in April. This is the third month in the last four that the index has been negative. Readings below zero indicate contraction. The report was weaker than expected. Economists were expecting to be essentially flat in April. "

Expect Basic Materials IYM to pull back. Higher costs for Basic Materials companies due to energy price spike matched with inability to raise prices in a near-recessionary environment.

[rbblum]

Presenting an economic environment as ' a recession unlike any previous recession ' allows an individual the opportunity to claim 15 minutes of fame and possibly maneuver into a profitable position . . . at the expense of others yet to preform due diligence to research.

[UrsusMajorus]

Interesting chart comparison but truly useless as the forces moving this market are entirely different. Whereas we appreciate your cheerleading, we will undoubtedly pay dearly for our gross excess and massive lack of monetary discipline. Question is when and how dearly we pay...

[Tom Lindmark]

Balsamo's charts require an explanation. The Fed decided to classify the TAF and the primary dealer credit facility as borrowed reserves. If you back out those facilities then total reserves have been very steady. No need for the alarm a first look at the chart tends to cause.

[DaveW]

So much Bulls vs. Bears nonsense. It doesn't matter who is right/wrong. This market is foolish right now but money can be made when things are both rational or irrational. In this irrational environment go in eyes-wide-open and be prepared to go with the flow of reality and then go with the flow of the fool's rally. Know when to wear either a bull or a bear hat, stick to one only and you will get burned.

[Skjellifetti]

Tom Lindmark --

Good point. That is why it pays to read the footnotes:

Please note breaks in data: Data prior to 2003-01-01 include adjustment, extended, and seasonal credit. Data from 2003-01-01 to 2007-11-01 include primary, secondary, and seasonal credit. Data from 2007-12-01 to 2008-02-01 include primary, secondary, seasonal, and term auction credit. Data from 2008-03-01 forward include primary, secondary, seasonal credit, primary dealer credit facility, other credit extensions, and term auction credit.

This is a graph that has apples up until it has apples and oranges.

[anewthought]

Have you considered that your starting point for both of those graphs is June 30th - but when you look at it from a % change standpoint the correlation falls apart. Sure, if the March 08 bottom is lined up with the Oct 90 bottom - then yes, there has been a bounce off the bottom - but it wouldn't be considered a bottom if there wasn't a bounce, right.

The only parallel that seems somewhat valid in the graphs is if you overlay the Oct 90 bottom and the March 08 bottom --- then you'd see a tracing - but what comes next after those short rallies - does this market go straight up like early 91 or does it not - too soon to tell.

It all comes down to the consumer this time - probably led by jobs, the depth of the housing market and finally, the credit availability extended by weakened banks. Those the the key factors.

[Kunst]

H-Bomb says, "...the end is neigh." You been getting advice from Mr. Ed? Try "nigh".