Since 2008, the US is experiencing the longest economic expansion in history of 128 months, breaking the record of 120 months of economic growth from March 1991 to March 2001*. This is also the longest bull market for stocks at 131 months. With the global concerns of the economic impact of the Coronavirus and the recent Oil Price War, trading in the stock market was halted due to circuit breakers for the first time in 20 years. As the expansion and continuation of the bull market come into question, there is often plenty of discussion on “when will the recession start”. Most investors are concerned about going through an economic recession because it is often believed that a recession and stock market crash go hand in hand. However, since 1945, the US has experienced 12 economic recessions and the average rate of return for the S&P 500 was 3.80%. So, let’s take a look at the difference between a recession and a bear market.
A recession is defined as at least two consecutive quarters of negative economic growth. It is the period in the economic cycle that follows a peak. A recession often includes higher unemployment rates and lower consumer spending. According to the NBER, since 1945, there have been 12 recessions that lasted on average, 11.1 months, with the longest being the 18-month Great Recession of December 2007 – June 2009. There are many different factors that can cause a recession. The top 10 causes of a recession are:
A bear market is defined as a 20% downturn or more in stock prices over at least a 2-month period. With the current bull market being the longest on record, Wall Street has an expression, “Bull markets don’t die of old age.” What causes bull markets to die and bear markets to begin? According to research by J.P. Morgan, bull markets typically die due to one or more of the following reasons: A forthcoming recession; extreme valuations; an aggressive central bank; or a commodity price spike.
Since 1945, there have been 16 bear markets, with 8 of them occurring in tandem with a recession.
When coupled with a recession, bear markets tend to not only last longer, but the impact is much more severe. When we look at the recessions, there have only been 3 recessions that have occurred where a bear market was not present Jul 1953 – May 1954, Apr 1960 – Fed 1961 and Jan 1980 – Jul 1980. Out of those 3, the only recession to not experience a bear market within the next year was the recession of 1953.
It is easy to see why recession concerns are at higher levels than before 2008-2009 Great Recession. 11 out of 12 recessions since the Great Depression occurred alongside a bear market, or a bear market occurred within the following 12 months. With almost 10,000 baby boomers retiring every day and the average loss for the S&P 500 during a recession at 36%, it makes sense why there is constant discussion in the media of when the next recession will happen.
While market timing is inefficient and can come with many sleepless nights. Instead of trying to pinpoint the peak in the cycle, it is important to consider the following tips.
– Don’t panic – Getting caught up in what news headlines are telling you or talking heads on TV are saying, always remember their job is to keep you tuned in for longer periods of time. Selling everything on one day to avoid further losses is one of the most emotional and damaging decisions an investor can make. According to Bloomberg, since 2009, there have been 6 stock market corrections of 10% or more (8 if you could the 9.8% and 9.9% drops in 2011 and 2012). Even with those corrections, the market is at all time highs. Missing the top performing days in the market can be damaging. J.P. Morgan did a study showing the impact that pulling out of the market has on a portfolio.
Here’s how a $10,000 initial investment fared over the past 20 years depending on if the investor stayed invested or instead, missed some of the market’s best days.
– Reconsider Your Risk Tolerance – After a long bull market, it is easy to look up after years and realize that your asset allocation, once moderate, now looks more moderately aggressive or even aggressive. Analyzing your risk tolerance and asset allocation at all times, not only when concerns of a recession rise, is extremely important.
– Maintain an Updated Financial Plan – Most investors have some reason they are investing. Whether it is to pay for a child’s education, fund a retirement, purchase a home etc. Maintaining an updated financial plan throughout different economic cycles will help give you confidence that your financial goals are still intact regardless of market cycle. Stress testing your asset allocation and ensuring that you can tolerate the fluctuations in your investment accounts will help provide discipline and avoid costly mistakes when volatility increases.
With all of the noise in the media and the volatility in the markets, I am often reminded of Bob Farrell’s 10 rules for investing. For decades investing legend Bob Farrell was a top Wall Street strategist known for predicting changes in overall stock market direction.
1. Markets tend to return to the mean over time
2. Excesses in one direction will lead to an opposite excess in the other
3. There are no new eras — excesses are never permanent
4. Exponential rapidly rising or falling markets usually go further
than you think, but they do not correct by going sideways
5. The public buys the most at the top and the least at the bottom
6. Fear and greed are stronger than long-term resolve
7. Markets are strongest when they are broad and weakest when
they narrow to a handful of blue-chip names
8. Bear markets have three stages — sharp down, reflexive rebound
and a drawn-out fundamental downtrend
9. When all the experts and forecasts agree — something else is
going to happen
10. Bull markets are more fun than bear markets
If retirement is on the horizon, make sure to check out our “Top 10 Retirement Considerations” investing guide or our self-navigating retirement tool.
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