Review of Recent Recessions and Their Affects on Business

By Hank Moore, Corporate Strategist™

Perhaps because we had seen such a long period of prosperity, the current economic recession is causing inordinate panic. The media is helping this panic with headlines such as "Economy shrinks at fastest pace in 26 years,” “Over One-Third of Americans Believe Nation in a Depression,” and “Wall Street Tumbles to 1997 Levels on Bank, Recession Fears.”

It’s important to read beyond the headlines and remember that recessions are actually a normal part of the business cycle. Recessions do have a valuable purpose in that they clear away weak companies and force people to spend less and save more. While this recession appears to be lasting longer than a normal recession, history has shown we will eventually emerge to a new period of economic growth and the stock markets will eventually recover their losses and hit new highs.

It’s easy to forget that we have had seven recessions since 1967.  While this recession may seem “different” for various reasons, it is important to remember that recessions usually have “different” causes or related events new to our history. Here are some examples:

1973-1974 Stock Market Crash and 1973 Oil Crisis (1973-1975) lasting 2 years.

§ In the 694 days between January 11, 1973 and December 6, 1974, the Dow Jones Industrial Average benchmark lost over 45% of its value.

§ The unemployment rate jumped from the 5% level to nearly the 9% in about a year and a half.

§ The Arab members of OPEC declared they would no longer ship oil to the United States and other countries if they supported Israel.

§ In 1972 the price of crude oil was about $3.00 per barrel and by the end of 1974 the price of oil had quadrupled to over $12.00.

§ In the United States, the retail price of a gallon of leaded regular gasoline rose from a national average of 39 cents in 1973 to 53 cents in 1974.

§ The New York Stock Exchange shares lost $97 billion in value in six weeks.

§ Inflation jumped from 3.4% in 1972 to 12.3% in 1974.

Early 1980’s recession (1980-1982) lasting 2 years.

§ The unemployment rate reached 10.8%.

§ Bank failures reached a high of 42, and in the first half of 1983 an additional 27 banks failed.

§ In 1984, the Continental Illinois National Bank and Trust Company, the nation's seventh-largest bank failed. Members of Congress felt Continental Illinois was "too big to fail." In May 1984, federal banking regulators were forced to offer a $4.5 billion rescue package to Continental Illinois.

§ 415 savings and loan associations in the US failed.

§ In 1979, inflation reached 13.3%7 and the Prime lending rate jumped to 21.5% by December 1980.

Early 1990’s recession (1990-1991) lasting 1 year.

§ By 1989, over half the Savings and Loan banks had failed, along with the FSLIC fund that was created to insure their deposits.

Early 2000’s recession (2001-2003) lasting 2 years.

§ By the end of 2001, the S&P 500 average price-to-earnings ratio was 46.50, well above the historical average of 15, and it was thought that “earnings didn’t matter” in the valuation of stocks.

§ The NASDAQ lost 78% of its value following the collapse of the Dot-com bubble.

§ From March 2000 to October 2002, technology companies lost $5 trillion in market value.

§ After the September 11, 2001 terrorist attacks, the Dow Jones Industrial Average suffered its worst one- loss and biggest one-week losses in history up to that point.

§ Unprecedented accounting scandals at companies such as Enron and Worldcom.

While no one knows for sure when this current recession will end, we do know that typically the stock markets recover before the technical end of a recession and that on average, the stock market earns 38.6% in the 12 months following the trough, or bottom, of the market.

No two recessionary periods are exactly alike. Some were driven by equity market bubbles, significant corporate earnings deterioration or to oil price shocks.

Since the beginning and end of a recession cannot be accurately called until well after they occur, it is all the more difficult to predict how the markets will perform before, during, and after any subsequent recession.

It is important to maintain a broad asset allocation plan to survive, and ultimately thrive, through a recession and post-recessionary market.

Companies must plan on how they will recover and grow during the next upturn.

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