Another Recession?

Global commodity prices have been rising for many months. The invasion of Ukraine by Russia and the sanctions imposed from the West will likely have a negative feedback loop on commodities, including oil, gas, wheat, and nickel prices. Our economy is less impacted by a rise in energy prices today compared to the 1970s and 1980s, but consumers will feel the pain of rising commodities.

Consumers remain the key driver of our service-dominated economy, accounting for over 70% of the U.S. GDP. The current conflict in Europe and the ongoing supply chain bottlenecks will exacerbate inflationary pressures. U.S. companies have managed to pass on the rising costs to the consumers. U.S. household spending on energy and other services has risen in recent weeks but remains far below the levels that have triggered past recessions. Favorable employment rates and wage gains best explains why consumers can withstand rising prices, at least so far.

However, with the Federal Reserve and other central bankers poised to raise short-term interest rates during the March FOMC and the months ahead, will the Fed inadvertently make a mistake, sending the U.S. economy into a recession?

Although the yield curve has yet to invert, the 10-year minus 2-year yields spread is contracting. A yield curve inversion has occurred before every recession since the 1970s. The lone exception was 1998 inversion which did not produce an economic downturn.

Many factors influenced stock prices, including geopolitical, macro, credit, business cycles, exogenous events, etc. Geopolitical events tend to produce temporary stock market setbacks. If the geopolitical crisis led to changes in economic conditions (i.e., longer-term inflation), and the Fed over-tightens, it can unintentionally create the next recession or stagflation cycle.

A few studies suggest that by December 2022, there is a 7.7% probability U.S. economy will slip into another recession. World Bank also warns global economic growth will slow in 2022. However, advanced economies will not achieve full output recovery until at least 2023. Others conclude an economic downturn will not come in 2022 but can arrive during 2023 or 2024, as sustained demand weakness and supply problems develop.

Since World War II, there have been a dozen recessions. The last U.S. economic recession occurred in 2020. It lasted only two months but was deep and broad-based. The National Bureau of Economic Research (NBER) determined that a peak in quarterly economic activity occurred in the fourth quarter of 2019. US economic activity plateaued from December 2019 through February 2020 and then declined precipitously from Feb-Mar 2020 due to the Covid-19 pandemic and the ensuing business lockdowns.

The committee concluded a significant broad contraction of economic activities occurred across the U.S. economy. Economic indicators, including unemployment, GDP, GDI, and U.S. production, deteriorated to warrant an official end to the economic expansion that began in June 2009. It lasted 128 months and was one of the lengthiest U.S. business cycles since 1854, exceeding the previous record of 120 months from March 1991 to March 2001. Although the recession was brief and pervasive, the February 2020 recession officially ended in April 2020.

History shows recessions have occurred for many reasons. It is often the result of imbalances in the economy. Exogenous events (i.e., medical crisis) such as the February to April 2020 recession and the ensuing public health response (lockdown) can sometimes trigger a sudden and dramatic downturn in the U.S. economy, resulting in a recession.

The characteristics and dynamics of the economic contraction were unlike the prior recessions. The severity of the decline in economic activities was also unprecedented impacting numerous market sectors and broad industries.

Is there another double-dip recession or a stagflation cycle?

Will the current exogenous event (i.e., Russia's invasion of Ukraine) create a commodity supercycle and prolong long-term inflation? Does a Fed policy mistake trigger a hard landing?

There are many unknowns, and the market and the economy are fluid. It will take time to address the above. However, we have data from previous recessions, courtesy of the National Bureau of Economic Research (NBER) that can offer insights into U.S. economic contractions and expansion cycles.

A brief review of the twelve (12) previous U.S. recessions, as defined by NBER, shows the following:

1. Average U.S. recessions sustain for 10-months. The median was also 10-months. The longest U.S. recessions occurred from December 2007 to June 2009 or 18-months during the global financial crisis/recession. The shortest was February 2020 to April 2020 during the Covid-19 pandemic or 2-months.

2. Average U.S. expansions endured for 64-months. The median was 52-months. The longest in U.S. history was the recent June 2009 to February 2020 or 128-months. The shortest was July 1980 to July 1981 expansion or 12-months. The current economic expansion cycle is 23-months and counting.

3. SPX returns (%) during prior recession periods was -2.83%. The median was 1.5%. Six (6) out of the past twelve (12) U.S. recessions or 50% of the time showed positive SPX gains.

In summary, U.S. recession cycles tend to be short-lived. It is in sharp contrast to the lengthy durations of U.S. expansion cycles. The briefest of the recessions occurred during the Covid-19 pandemic recession from February 2020-April 2020 (2 months), resulting in SPX declining by 35%. The global financial crisis-induced recession from December 2007-June 2009 sustained for 18-months and led to SPX losing 37% of its value. The November 1973-March 1975 16-month recession triggered an SPX decline of -13%.

The remaining nine (9) U.S. recessions generated negative SPX returns, spanning from -5% to -2%. However, six (6) of the previous U.S. recessions led to SPX gains. July 1953 to May 1953 recession (10-months) was noteworthy as it resulted in SPX gains of +18%. April 1960 to February 1961 the recession also witnessed SPX gains of 17%. Interestingly, both recessions coincided with the SPX secular/structural bull trend of 1949-1965.

In our lifetime, it is rare to experience an exogenous event such as the Covid-19 pandemic induced recession, an unprecedented global lockdown, and an explosive global reopening. The closest resemblance of a medical-induced crisis that led to a U.S. recession was the 1918 influenza pandemic known as the Spanish flu. The virus infected 500 million people worldwide or one-third of the global population. Influenza killed an estimated 20-million to 50-million victims, including 675,000 Americans.

Upon further review of the long-term structural trends of the U.S. equities, the Spanish flu occurred during the latter stages of the brutal 1901-1920 structural bear market. After the structural bear ended, it led to one of the fastest and most explosive structural bulls in U.S. history, namely the 1921-1929 roaring twenties structural bull market.

The -35.41% February to April 2020 bear decline from February to April 2020 is a severe cyclical bear decline triggered by an exogenous event (medical/pandemic) and a global recession. Most U.S. recessions come from credit and economic crises. The February to April 2020 recession occurred during an existing structural bull trend in U.S. equities most likely prevented the onset of a structural bear decline.

The duration of the structural bull trend is currently 8-years and 10-months. In one structural bull stock market cycle, you can find a few cyclical-bear declines, even as severe as the recent 35.41% Covid-19 pandemic decline. It is reasonable to expect the May 2013-present structural bull trend will continue if these are only deep corrections or cyclical bear declines. Also, structural bull and bear trends in the U.S. tend to span from 8-years to 20-years. The May 2013-present structural bull remains one of the younger secular bulls in U.S. history.

While the odds of a recession may increase, stocks can still generate positive gains even if we slip into another recession during 2022, 2023, or 2024. Stocks have averaged returns of 10% soon after the yield curve inverts and signs of deteriorating economic conditions. In a recession, investors will experience higher volatility and more investment challenges. However, during the difficult periods of the double-dip recession in 1980 and 1981-1982, SPX produced gains of 7% and 6%, respectively. The economic trough in 1982 also led to the explosive 1982-2000 structural bull.

A structural bear is one thing. But, if the current market correction is a deep correction (10-20%) or a cyclical bear (20%-plus) operating within a structural bull trend, it would imply another buying opportunity may soon develop into 2022 or 2023.

Source: Courtesy of National Bureau of Economic Research and Lee NY Holdings LLC.

Source: Chart courtesy of

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