26th January 2021
What a cheery title eh?! This week’s piece is not intended as a history lesson. Indeed, if you are a history buff you’ll know more about many of the events of the past century than I do.
At Informed Decisions we prefer to focus on what we can control and to look forward but having said that it’s useful to take the odd glance backwards to see what we can learn. History doesn’t repeat itself but it rhymes, and all that!
It was actually when I was reading a WSJ article the other day that it struck me (again) how very unusual the global economics seem to be at times like these. We ALL know what has happened over recent times, and yet sales of homes have surged to 14 year highs in the US. Sales of homes last month (Dec 2020) were apparently 22% higher than they were the previous December! This is a country that has been as ravaged as badly as any by you-know-what. Home sales up 22%!
So it is REALLY unusual!? It may be surprising to read of record sales initially – because we assume the worst in times like these right!? Much like lots of what has happened over the past 12 months, nobody saw that level of home sales happening either! Yet, when we see the rationale for that particular growth in home sales (notably; remote working, low interest rates, many people earning the same and spending less, record levels of cash reserves), it’s actually not surprising at all.
Much like all recessions in history (or at least in my memory), it’s impact on equity markets/investors was perhaps well and truly over way way before many of us realised or accepted it was. The global economy shrank by c4.5% in 2020 (a Global Large Cap Equity Index grew by c6%). It was/is an undeniable global recession and financial crisis. While the cause of it took most of us by surprise, the fact that it happened shouldn’t have.
Recessions (and depressions) are as much a part of our history as our growth and progress has been. With all due respect to them and their impact on many of us, I’ve heard the concept that we’d be best to view them as growing-pains. In a way it does seem a very cold and calculating way to view recessions. Having said that it is true to say that none of us can physically build muscle without first stressing muscle, we can’t get faster without first exhausting ourselves, we can’t improve something without hardship of one variety or another! Or to use the classic; you can’t make an omelette without breaking eggs (did I ever tell you my omelette story!?).
I’m going to now share a brief note on 6 of the most savage recessions of the past 100 years. Many of us weren’t around for many of the big and early ones here, but maybe that’s a large part of why it can be useful to briefly reflect on them! When training astronauts they simulate all sorts of potential in-flight disasters – so as that when it actually DOES happen, the astronauts will know what to do – and indeed what NOT to do!
When we reflect on these recessions that shuck the world lets too remind ourselves of the constant upward curve that the human race (and the equity markets) have been on over all this time. If nothing else, it might be mildly interesting! Oh, and for reference, a recession is formally called a recession once there are two consecutive months of contraction of Gross Domestic Product (GDP), often combined with unemployment data. It doesn’t take much for a period of difficulty to be called a recession. Here goes:
Probably the most oft referred-to of recessions. The market decline spanned from 1930 to 1933. Apparently industrial production fell by 48%, and unemployment hit 20-35% in many countries across the world. By the time the market bottomed-out it had fallen ( albeit temporarily) by a whopping 83.6%. In other words, if your pension pot was worth €1m in 1929, you looked at your statement in 1933 and it read €164k. Savage stuff.
The dooms-dayers (it would be difficult for all but the most stoic not be in those circumstances!) of course bailed, or were forced to bail due to cash reserves being obliterated. They lost the vast majority of their pensions and investments forever. Those that were capable of sticking to their plan held on and saw their values get back to their 1929 prices within 4 years.
Industrial production plummeted by 26% during this 8 month recession towards the end of World War II. While it was an incredibly awful toll on human life, the market downturn during this defined recession lasted a single month, and market values temporarily fell by 3.9%. The 1950’s then saw what is now termed as the ‘golden age of capitalism’ when the post-war boom took hold. This very broad time of worlwide economic expansion and growth hit a couple of tiny speed-bumps but rattled-on until the recession of the 1970’s.
By all accounts it was a great decade to be in one’s ‘prime’ – however with inflation hitting double digits during the mid-70’s it was an expensive time. No wonder any photo my folks have from the 70’s shows them wearing the same clothes, and an ice-cream cone was considered a serious luxury item! Apparently, if you had a car and you wanted to drive it, you’d to first push it to the garage and join an hour-long queue. The stock market lost nearly half of its value of the nearly year and a half economic downturn, temporarily declining by 46% in value. Again, to use that pension pot invested in equity valued at €1m in 1973, the value showed €540k by early 1975. Again, if you sated the course, you had fully recovered (plus change) within 2 years.
While many (my mother) will say that 1980 was one of the best years ever (she gave birth to me!), the 1980’s saw another recession hit us. The 80’s was a bleak period in Ireland by all accounts, leading to the now fabled ‘brain drain’ and mass emigration. That recession hit Ireland pretty badly it seems. However, globally the recession lasted the minimum duration it needed to in order to be called a recession, 6 months. Markets declined (again temporarily) by 12% here over the course of 2 months. Another hammering hit in 1981 and 1982, a 16 month recession, seeing the markets decline by a further 16% over the year and a half. Again, those that stayed invested reaped savage rewards over the coming decades.
As recessions go it was a mild one, lasting just 8 months and industrial production receding 3%, and max unemployment in the US at least of (only 5%. The market however went on a fairly significant temporary decline of 33% over a year-long period 2001 to 2002.
The most enduring on most of our memories (because it was the most significant in recent memory). This year and a half recession ran from 2008 to 2010 officially, GDP down 4%, industrial production down 17% – and the markets equally hammered (temporarily!) by 50%! It was carnage. Again, those that held firm in their investments were rewarded with an 11 year recovery. If your pot was valued at say €1m at the ‘bottom’ in 2009, you saw your values quadruple over the coming 10 years – just by leaving it alone!
For context we are told that GDP globally will recede by approx 4-5% in this current recession. We’re told that unemployment is/will be up to 10-15% in some parts of the world. Markets fell by 30-40% in a savagely swift temporary decline in March 2020. This too was followed by a savagely quick market recovery in the following 9 months.
When will the next recession hit – how long will the current one last – where will the markets go over the course of 2021? Nobody knows the answer to any of those last three questions.
For many of us it’s a case of looking after ourselves, our loved-ones, and those we can help, sticking to our investment/accumulation/spending strategy, and living the life we want to live.
In astronaut-speak we know that we should NOT do when ‘this’ happens:
What we should do when ‘this’ happens:
Oh, since that Great Depression there has been many other recessions and bear markets other than the ones noted above. As you will already know dear reader, since WWII at least, there has been a market decline of at least 30% on average every 5 years – and an annual temporary decline of an average 14%. Despite, or as some would say, because of these ‘growing pains’, the global equity investor has received an average c10% annual growth for putting up with that volatility. Risk Premium dear reader.
Oh, and according to Oxford Martin School, the number of people living in ‘Extreme Poverty’, have fallen by 45%, from a 1.29 billion people in 1910, to 733 million in 2015. Progress.
Did you see that the sale of Prize Bonds were up 92% last year!! Prize bloody Bonds! And dear reader, as if they weren’t already awful, they are cutting the amount of prize money to be won. Oh, and the interest rates on State Savings (which was the last half-decent place to keep emergency cash) are also being cut. With ECB rate at -0.5% is it really that surprising! These are the times we are in!
Thanks for reading,
Paddy Delaney QFA RPA APA
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