The National Bureau of Economic Research (NBER) is an American private, non-profit research organization dedicated to conducting economic research and the official arbiter of calling the start and end of US economic recessions.
Today NBER reported that the US economy officially fell into a recession starting in February 2020. The committee determined that a peak in quarterly economic activity occurred in the fourth quarter 2019 as US economic activity plateaued from December 2019 through February 2020, and then declined precipitously from Feb-Mar 2020 due to special circumstances associated with the coronavirus pandemic and the ensuing business lockdowns both in the US and around the world.
The committee concluded that a significant broad contraction of economic activities spread across the US economy has occurred as defined by various key economic indicators including unemployment, GDP, GDI, US production, and other economic measures to warrant an official end to the US economic expansion that began in June 2009. This expansion lasted 128 months or one of the longest in the US business cycles dating back to 1854. This exceeds the previous record of 120 months from March 1991 to March 2001.
History shows that US recessions in the past have occurred for many reasons. Typically, it is the result of the imbalances in the economy that need to be reset. However, an exogenous event (medical crisis) has led to the current recession as the pandemic and the public health response have resulted in a sudden and dramatic downturn in the US economy. The characteristics and dynamics of this current economic contraction are unlike the prior recessions. Nonetheless, the magnitude of the decline in economic activities has been unprecedented and its broad impact across different sectors and industries of the economy fits the definition of a recession.
So, now that NBER has officially called the start of the US recession in February 2020 what does this mean for the US stock market and investors? And since this an exogenous or external induced shock leading to the current recession, which differs from your normal recession, can we expect the duration of this contraction to be briefer than previous economic downturns?
A brief review of the 11 previous US recessions as defined by NBER shows that the following statistics:
- Average US recessions/contractions sustained for 11-months. The median was 10-months. The longest of the US recessions was the global financial crisis recession from December 2007 to June 2009 or 18-months. The shortest of the US recessions was the first of the double-dip recession from Jan 1980 to July 1980 or 6-months.
- Average US expansions endured for 64-months. The median was 52-months. The longest in US history was the recent June 2009 to February 2020 or 128-months. The shortest was the July 1980 to July 1981 expansion or 12-months.
- SPX returns (%) during prior recession periods was 0.09%. The median was 5%. Six (6) out of the past eleven (11) US recessions or 55% of the time were positive.
In summary, based on the above information it appears prior US recessions cycles tend to be short-lived as compared to the lengthy durations of prior US expansion cycles. Although the December 2007-June 2009 or 18-month recession resulted in SPX declining -37% and the November 1973-March 1975 or 16-month recession led to SPX falling -13% the remaining US recessions that generated negative returns SPX fell only -5% to -2%. Six previous US recessions resulted in positive SPX gains. July 1953 to May 1953 contraction of 10-months was noteworthy as it resulted in SPX gains of +18%. Another interesting recession was April 1960 to February 1961 recession which witnessed SPX gaining 17%. Note that both recessions occurred during the SPX secular/structural bull trend of 1949-1965.
We have not witnessed an exogenous event (coronavirus pandemic) of this magnitude in our lifetime. The closest resemblance of a medical induced crisis that led to a US recession was the 1918 influenza pandemic known as the Spanish flu. The virus infected 500 million people worldwide or one-third of the planet’s population and killed an estimated 20-million to 50-million victims, included were nearly 675,00 Americans. Upon a further review of the long-term structural trends of the US equities, the Spanish flu occurred during the latter stage of the brutal 1901-1920 structural bear market. When the structural bear ended it led to one of the fastest and most explosive structural bulls in US history, namely the 1921-1929 roaring twenties structural bull market.
It is our contention the -35.41% February to March 2020 bear decline and hence the February 2020 US recession may have been a severe cyclical bear decline triggered by an external event (medical pandemic) as compared to a US recession that leads to the start of a structural bear. Why? The dominant and prevailing long-term structural trend in US equities remains that of the May 2013-present structural bull.
The duration of the structural bull trend is only 7-years old. It is common to expect that within a structural bull trend there may be one or more cyclical bear declines even at the severe magnitude of the 35.41% decline that we recently experienced. This would imply that the May 2013-present structural bull trend is not a mature structural bull trend as many structural bull and bear trends tend to span from 8-years to 20-years.