Market watching in the 21st century features real-time analysis to a degree that was the stuff of dreams even 10 years ago. The problem is that economic crises aren’t likely to be resolved any faster today than they were 50 or 100 years ago.
Any one sitting in their bedroom can get institutional-quality quotes on securities these days. Meanwhile, an array of software-based financial analytical models with extraordinary power and depth can be deployed at affordable prices. But while we’re all working on 21st century terms, the economic mess we’re in is still likely to unwind at a 20th century pace. It’s worth noting too that the factors that got us into this pickle were also familiar staples in the economic crises of yore.
Yes, economists have learned a lot over the years. But even assuming that the dismal scientists running the show today are smarter, some if not all of the 21st century intelligence is offset by the magnitude of the downturn currently running wild.
As a result, patience, fortitude and a long-term outlook remain the bedrock for investment success going forward. Some things never change. Most of us will lose our heads and run for cover and reduce all risk exposures to zero. Par for the course. That leaves prospective returns all the higher for disciplined investors. That doesn’t make dealing with the catastrophe du jour any easier, but then no one ever said managing risk was easy over a full business cycle.
The trouble this time around is that the cycle is meaner and nastier than usual. Unfair? Perhaps, although today’s problems come after an unusual and unsustainable run of kinder, gentler cycles. Some investors are shocked, shocked at the dire turn of events. But the warning signs were there are along. The remarkable period of calm and stability on the economic front couldn’t go on forever, as we opined in April 2008. The month before, we warned that recession of some sort looked inevitable. The crowd hoped for better, but irrational optimism was again dealt the hand of fate.
So, what should we expect now? The past offers a few crumbs of perspective for how to think about the current ills. Let’s start by remembering that the average length of recession since 1945 has been 10 months. The previous two recessions (1990-91 and 2001) were exceptionally short and shallow, lasting a mere 8 months each. The current contraction is now in its 14th month, according to NBER, and the hope that it’ll be over in the coming months is probably asking for too much.
The longest recession in NBER’s database is a crushing 65 months (1873-1879). In second place is the 1929-33 downturn that clocked in at 43 months. We don’t expect the current ills will last that long, although we’re likely to surpass the 16-month recessions of 1973-74 and 1981-82.
For what it’s worth, we expect something on the order of a 24-month contraction, which would bring the contraction to an end at the end of this year. In turn, that would comfortably make this downturn the longest—and probably the deepest—since the Great Depression. Today’s news of another round of declines in housing starts and industrial production for last month doesn’t offer any reason to change our view.
What does this mean for the stock market? More of the same, of course. But again, historical context offers a bit of perspective. The average bear market for the S&P 500 lasted about 15 months, according to analysis by Crandall, Pierce & Co. The longest was 3 years; the shortest a brief 3 months. At the moment, the bear market is 16 months of age, based on the S&P’s peak in October 2007.
Will we get to 3 years? Maybe, although we’re expecting the rout to be over by the end of the year, if not earlier. Getting from here to there, though, will deliver one hell of a bumpy ride.
In any case, we’re confident that the market will bottom out ahead of the economy, assuming history’s any guide. But no one should expect a quick and robust rebound, in either the stock market or the economy. Yes, this is one more cycle in a long list of downturns. But this one will last longer and cut deeper than most.
It’s going to be a long year. Pace yourself.