Over the last 100 years, there have been about 17 recessions or bear markets with an average downturn of about 10 months.
The purpose of this article is to give you perspective that when recessions happen, they typically don’t happen for long. The only recession that lasted a considerable amount of time was the Great Depression, which started in 1929. Since that time, new laws have been established to help prevent drastic recessions.
In summary, recessions are a great opportunity to buy more stocks!
Key metrics to reference
- Good unemployment is between 3% and 5%.
- Average stock market return per year over the last 100 years is about 10%.
1) The Great Depression
When: 1929 – 1941
Duration: 12 Years
Downturn: -17% in 1929, -33% in 1930, -52% in 1931, and -23% in 1932
Unemployment: 25%
Cause: Leading up to the Great Recession, investors were not buying shares based on fundamentals, they were buying shares based on where they think the share prices will go. In other words, it was highly speculative. Also, at the same time, interest rates were low and people could acquire capital easily to hire more people to produce more goods, faster. This created an oversupply, especially with food and steel, which caused companies to dump the excess supply, which in turn caused share prices to fall. Overall, this created a chain reaction of a massive sell-off.
The Great Depression led to the creation of several regulations by the Securities and Exchange Commission (SEC) that indirectly control market activity, including restrictions on margin buying and short selling.
Here are some of the regulations the Great Depression helped create:
- The Securities Act of 1933 is a federal law that protects investors by requiring companies to provide accurate information about securities. It also prohibits fraud in the sale of securities. The act is also known as the “truth in securities” law.
- The Securities Exchange Act of 1934 is a law that regulates the trading of securities in the United States. It was created in response to the financial crisis that led to the Great Depression.
- The Investment Company Act of 1940 is a law that regulates investment companies and funds. It was passed by Congress to protect investors after the stock market crash of 1929. Requires companies to disclose their investment policies and financial condition to investors. Ensures investors are aware of the risks of buying and owning securities. Regulates the structure and operations of investment companies.
- The Investment Advisers Act of 1940 is a federal law that regulates investment advisers and their activities. It also defines the responsibilities of investment advisers.
2) The Union Recession
When: 1945
Duration: 8 months
Downturn: -8%
Unemployment: 5.2%
Cause: As the United States entered the sixth and final year of World War II, a reduction in government spending caused a decrease in GDP. The Union Recession emerged as a result of the subsequent demobilization and the overall transition from a wartime to a peacetime economy. It was named for the significant rise in union-related work stoppages during that period, which directly contributed to a decline in production and economic output. Contrary to the expectations of economists of that era, this recession proved to be much milder and less severe than anticipated, possibly due to the influence of prior recessions on public expectations.
3) The Post-World War II Recession
When: 1949
Duration: 11 Months
Downturn: -2%
Unemployment: 7.9%
Cause: The “Post-WW2 Recession” describes the economic downturn in the United States that took place between November 1948 and October 1949. This period was characterized by reduced economic growth, high unemployment, and a decline in consumer spending as the nation shifted from a wartime to a peacetime economy. Economists often refer to this period as the “Post-War Recession.”
4) The Post-Korean War Recession
When: 1953
Duration: 10 Months
Downturn: -4%
Unemployment: 6.1%
Cause: Following an inflationary period after the Korean War, additional funds were directed toward national security. In 1951, the Federal Reserve reestablished its independence from the U.S. Treasury. By 1952, the Federal Reserve adopted a more restrictive monetary policy due to concerns about further inflation or the potential formation of an economic bubble.
5) The Eisenhower Recession
When: 1958
Duration: 10 Months
Downturn: -13%
Unemployment: 6.2%
Cause: The 1958 recession, also known as the Eisenhower Recession, was caused by a number of factors, including a global pandemic that killed over 1 million people (bird flu), tight monetary policy, and a decline in consumer confidence.
6) The Rolling Adjustment Recession
When: 1960
Duration: 10 Months
Downturn: -9% (Dow Jones)
Unemployment: 7.1%
Cause: The Federal Reserve began raising interest rates in 1959. The government switched from a deficit of 2.6% in 1959 to a surplus of 0.1% in 1960. When the economy emerged from this short recession, it began the second-longest period of growth in history at that time.
7) The Nixon Recession
When: 1969 – 1970
Duration: 11 Months
Downturn: -15%
Unemployment: 6.1%
Cause: The mild recession of 1969 occurred after a prolonged period of growth from 1960 to 1969. As the expansion came to an end, inflation began to rise due to increasing deficits. This mild recession aligned with efforts to reduce the budget deficits from the Vietnam War through fiscal tightening, as well as the Federal Reserve’s decision to raise interest rates, marking a phase of monetary tightening.
8) The Oil Shock Recession
When: 1973 – 1975
Duration: 1 Year and 4 Months
Downturn: -16% in 1973 and -27% in 1974
Unemployment: 9%
Cause: The 1973–1975 recession was a significant global economic downturn triggered by a dramatic surge in oil prices. It represented the most severe economic contraction in the period following World War II. The crisis began when Arab oil producers imposed an embargo on the United States due to its support of Israel during the 1973 Yom Kippur War. This embargo led to a 400% increase in oil prices within just a few days.
9) The Energy Crisis Recession 1
When: 1980
Duration: 6 Months
Downturn: No downturn. The market went up 15%.
Unemployment: 7.8%
Cause: The United States entered a recession in January 1980, which lasted until July. The recession was caused by high oil prices and rising interest rates.
10) The Energy Crisis Recession 2
When: 1981 – 1982
Duration: 1 Year and 6 Months
Downturn: -9%
Unemployment: 10.8%
Cause: The 1981–1982 recession was a severe economic downturn in the United States that lasted 16 months. It was the worst economic downturn in the country since the Great Depression. Inflation was high in the late 1970s and the Federal Reserve raised interest rates to fight it. The economy was already weak after a recession in 1980. The price of oil rose, which contributed to inflation
11) Black Monday
When: October 19th, 1987 – November 30th, 1987
Duration: 1 month
Downturn: -22%
Unemployment: No impact
Cause: There wasn’t a specific pinpoint cause but there were two large contributing factors. First, computer trading or “program trading” was relatively new to the markets in the mid-1980s. Computers enabled brokers to place large orders and implement trades more quickly. These computers were programmed to automatically execute stop-loss orders, selling out positions, if stocks dropped by a specific percentage. On Black Monday, the stop-loss selling began, which created a domino effect of massive selling as the market dropped. Second, Portfolio Insurance was a new product introduced to the market. Portfolio insurance allowed large institutional investors to hedge their stock portfolios by taking short positions in S&P 500 futures. In other words, portfolio insurance was designed to automatically increase the value of their portfolio if there was a significant decline in stock prices. As stock prices declined, large investors sold short more S&P 500 futures. The downward pressure in the futures market put more selling pressure on the overall stock market, which also created a domino effect selloff.
12) The Gulf War Recession
When: 1990 – 1991
Duration: 1 Year
Downturn: -7%
Unemployment: 7%
Cause: The recession that occurred in the United States from July 1990 to March 1991 is known as the Gulf War Recession. It was a mild recession that was caused by the Gulf War and the savings and loan crisis. The savings and loan crisis was the build-up and extended deflation of a real-estate lending bubble in the United States from the early 1980s to the early 1990s. The savings and loan crisis unfolded as a protracted real estate lending bubble in the United States from the early 1980s to the early 1990s. It resulted in the collapse of numerous savings and loan institutions and the insolvency of the Federal Savings and Loan Insurance Corporation, costing taxpayers billions of dollars and contributing to the recession of 1990–91. The crisis stemmed from excessive lending, speculation, and risk-taking, fueled by the moral hazard of deregulation and taxpayer bailout guarantees. Some savings and loan institutions were involved in outright fraud, with insiders either participating or allowing such activities. In response to the crisis, Congress enacted the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), which significantly overhauled regulations for the S&L industry.
13) The Dot-com Bubble Recession
When: 2000 – 2002
Duration: 2 years
Downturn: -10% in 2000, -13% in 2001, and -23% in 2002
Unemployment: 6.3%
Causes: Between 1995 and 2000, the Nasdaq increased by 400%. This time period was indeed a bubble. There was a lot of hype behind tech stocks. Businesses would literally add a “.com” to their name and their share price would skyrocket. In March of 2000, Barron’s featured an article titled “Burning Up; Warning: Internet companies are running out of cash—fast”, which predicted the bankruptcy of a lot of Internet companies. In other words, the truth was revealed. Most of these internet businesses had absolutely terrible financial statements. Investors began to rethink their investments and the selloff began. The S&P 500 went down 10% that year but the Nasdaq went down 39%. The next two years were also well into the negative for both the S&P 500 and the Nasdaq.
14) The Great Recession
When: 2008
Duration: 9 Months
Downturn: 38%
Unemployment: 10%
Causes: After 2001, the prime rate in the US (the interest rate that banks charge their low-risk customers) had enabled banks to issue mortgage loans at lower interest rates to millions of customers who typically would not have qualified for mortgage loans in the first place due to bad credit and inconsistent income. This in turn increased the demand for new housing which pushed home prices higher. When interest rates finally began to increase in 2005, the demand for housing, even with qualified borrowers, declined, which caused home prices to fall. Due to higher interest rates, most subprime borrowers could no longer afford their loan payments. Nor could they save themselves, as they formerly could, by borrowing money against the value of their homes or by selling their homes for a profit. Many borrowers, both prime and subprime, found themselves “underwater,” meaning they owed more on their mortgage loans than their homes were actually worth. As the number of foreclosures increased, banks stopped lending to subprime customers, which further lowered demand as well as home prices.
As the subprime mortgage market collapsed, many banks found themselves in trouble, because a major portion of their assets were composed of subprime loans or bonds. The underlying subprime loans in any given mortgage-backed security were difficult to track, even for the institutions that owned them. This caused banks to doubt each other’s stability, leading to a credit freeze, which prevented banks from extending credit even to financially healthy consumers and businesses. Thereafter, businesses were forced to reduce their expenses, leading to massive underemployment and unemployment. This significantly reduced consumer confidence, which reduced consumer spending. Overall, the domino effect caused a major global market crash. The S&P 500 went down 38%, which was the lowest since the Great Depression Crash.
15) The Trump Tariff War 1
When: 2017 and 2018
Duration: 6 months
Downturn: 7%
Unemployment: No impact
Causes: Trump started tariff negotiations with China in September of 2017, which caused the S&P 500 to fall about 7% and the Nasdaq to fall about 5%. The stocks that took the biggest hit were semiconductor stocks which in some cases, fell over 30%. After the negotiations came to a halt in March of 2018, the market started taking off again. After the “dust settled”, no new tariffs were put in place. As analysts on Wall Street stated “We just kicked the can down the road six months to end up where we started.” Overall, this ended up being a short buying opportunity for investors who were prepared to deploy capital.
16) The COVID Dip
When: 2020
Duration: 3 Months
Downturn: 30%
Unemployment: 14%
Causes: On 27 February, due to mounting worries about the COVID-19 pandemic, stock markets in Asia-Pacific and Europe saw declines with the NASDAQ-100, the S&P 500, and the Dow Jones Industrial Average posting their sharpest falls since The Great Recession.
17) The Technical Recession
When: 2021 – 2023
Duration: 1 Year and 6 Months
Downturn: 20%
Unemployment: 3.8%
Causes: There were three causes of the Technical Recession, including 1) COVID-19 Omicron variant. 2) Russia’s threats of invading Ukraine. 3) Inflation rates started rising due to disruptions of the supply chain from COVID-19. In other words, food manufacturers were not able to manufacture food as fast as they previously were, which caused food prices to skyrocket.
Summary
Keep in mind that recessions typically don’t last long. Try to use this opportunity to buy more shares of On Sale stocks as they decrease. When the market goes back up abruptly, which it typically does, that’s when you can make big returns!
If you’re looking for On Sale stocks to buy when the market drops, I invite you to join Tykr for free.