The old saying “History doesn’t always repeat itself, but often rhymes”, is based more on fact than fiction. By studying the US Economic Recession History, you should better understand how current recessions may affect your financial life today.

I focus on recessions simply because they have a dramatic effect on 401k balances and investments in general. During the last recession, which was officially from March of 2001 through November 2001, the major market indexes plummeted. The Nasdaq Index declined over 70% from it’s high within a year surrounding the recession. This index still hasn’t recovered. It is still only half of where it once was.

Could you have avoided this downfall by studying the US Economic Recession History? Maybe, but maybe not. Let’s look at the problem. The National Bureau of Economic Research (NBER) is the official agency that determines when recessions begin and end in history. Since recessions have such a detrimental effect on our investments, wouldn’t it be nice if they would notify us when one is beginning? Yes it would, but they don’t. The Nasdaq Index lost over 43% from its high before the NBER determined we were in our last recession. It took them 9 months after the beginning of the recession to announce it had begun. Is this a fluke? Unfortunately not. The official notification of the beginning of the last 4 recessions came an average of 228 days after they had already begun. This is an 8 month delay.

The way numbers work, if you lose 50% of your portfolio, you must earn 100% just to break even. If you had $100,000 and lost 50% ($50,000), you are left with $50,000. You must double this (100%) in order to break even. This is why it seems to be twice as hard to regain money after losing it. It took the Dow Industrial Index and S&P 500 Index around 6 years to get back to even after the last recession.

Let’s pretend you’ve lost 43% of your portfolio and are determined NOT to lose any more. You sell your stock funds and put your account into the safety of the money market. Your account is now safe for the rest of the recession. Will knowing the US Economic Recession History help you determine when the recession is over? Once the recession is over, you definitely want to move back into stocks so that you don’t miss the next increase in the market. After all, you need to make almost 100% just to break even!

NBER announced the last recession was over on July 17, 2003. Unfortunately they announced it was over in November of 2001! Yes they didn’t determine the last recession was over until nearly 2 years later. Had you had your investments strapped down for the winter winds of recession, you could have missed the excellent recovery period that typically follow recessions. The end of the last 4 recessions were officially announced an average of 522 days (17 months) after they were over.

Studying the US Economic Recession History may be helpful for some, but I don’t find it very helpful in managing investment portfolios. I find that tracking Supply vs. Demand in the investment markets is a much better way to protect assets. When supply begins to outweigh demand, simply change the portfolio to a more conservative stance. This usually happens near the beginning of recessions and you have plenty of time to switch your portfolio to safety. The opposite occurs near the end of recessions. Demand shows back up and you begin to change the portfolio to one of moderate risk.

The upside to recessions is the fact that periods of expansion last about 5 times longer than recessionary periods. There were 10 Recessionary cycles since 1945. The recession side of these cycles lasted on average 10 months. The expansion side lasted on average 57 months. If you can protect your money during the 10 recessionary months you won’t have to spend a lot of the expansion months trying to get back to even. You can instead be exploring new highs for the portfolio.

Late 2000′s Recession
OCTOBER 2008 – CURRENT

In 2008, the possibility of an economic crisis was suggested by several important indicators of economic downturn worldwide. These included high oil prices, which led to both high food prices (due to a dependence of food production on oil production) and global inflation; a substantial credit crisis leading to the bankruptcy of several large and well established investment banks; increased unemployment; and a global recession developed.

President: George W. Bush (R) [2001-2009]

Early 2000′s Recession
APRIL 2000 – OCTOBER 2001 (18 months)

The collapse of the dot-com bubble, the September 11th attacks, and accounting scandals contributed to a relatively mild contraction in the North American economy.
President: William J. Clinton (D) [1993-2001]
President: George W. Bush (R) [2001-2009]

Early 1990′s Recession
JULY 1990 - APRIL 1991 (10 months)

Industrial production and manufacturing-trade sales decreased in early 1991.
President: George Bush (R)

Early 1980′s Recession
APRIL 1980 - OCTOBER 1982 (30 months)

The Iranian Revolution sharply increased the price of oil around the world in 1979, causing the 1979 energy crisis. This was caused by the new regime in power in Iran, which exported oil at inconsistent intervals and at a lower volume, forcing prices to go up. Tight monetary policy in the United States to control inflation lead to another recession. The changes were made largely because of inflation that was carried over from the previous decade due to the 1973 oil crisis and the 1979 energy crisis.
President: Jimmy Carter (D) [1977-1981]
President: Ronald Reagan (R) [1981-1989]

Oil Crisis of 1973
APRIL 1973 – APRIL 1975 (24 months)

A quadrupling of oil prices by OPEC coupled with high government spending due to the Vietnam War lead to stagflation in the United States.
President: Richard Nixon (R)

Recession of 1957
JULY 1957 – APRIL 1958 (10 months)

Monetary policy was tightened during the two years preceding 1957, followed by an easing of policy at the end of 1957. The budget balance resulted in a change in budget surplus of 0.8% of GDP in 1957 to a budget deficit of 0.6% of GDP in 1958, and then to 2.6% of GDP in 1959.
President: Dwight Eisenhower (R)

Recession of 1953
APRIL 1953 – APRIL 1954 (12 months)

After a post-Korean War inflationary period, more funds were transferred into National security. The Federal Reserve changed monetary policy to be more restrictive in 1952 due to fears of further inflation.
President: Dwight Eisenhower (R)

Recession of 1947
APRIL 1947 – OCTOBER 1947 (12 months)

Stock markets crashed worldwide, and a banking collapse took place in the United States. This sparked a global downturn, including a second, more minor recession in the United States, the Recession of 1937.
President: Harry S. Truman (D)

The Great Depression
1929 - 1939 (120 months)

The Great Depression was a worldwide economic downturn starting in most places in 1929 and ending at different times in the 1930s or early 1940s for different countries. It was the largest and most important economic depression in modern history, and is used in the 21st century as a benchmark in how far the world’s economy can fall. The Great Depression originated in the United States; historians most often use as a starting date the stock market crash on October 29, 1929, known as “Black Tuesday”. The end of the depression in the U.S. is associated with the onset of the war economy of World War II, beginning around 1939.

President: Herbert Hoover (R) [1929-1933]
Franklin D. Roosevelt (D) [1933-1945]

Post-WWI Recession
1918 – 1921

Severe hyperinflation in Europe took place over production in North America. It was a brief, but very sharp recession and was caused by the end of wartime production, along with an influx of labor from returning troops. This in turn caused high unemployment.

President: Woodrow Wilson (D)

Panic of 1907
1907 - 1908

A run on Knickerbocker Trust Company deposits on October 22, 1907 set events in motion that would lead to a severe monetary contraction.

President: Theodore Roosevelt (R)

Panic of 1893
1893 – 1896

Failure of the United States Reading Railroad and withdrawal of European investment lead to a stock market and banking collapse. This Panic was also precipitated in part by a run on the gold supply.

President: Grover Cleveland (D)

Panic of 1873
1873 - 1879

Economic problems in Europe prompted the failure of the Jay Cooke & Company, the largest bank in the United States, which bursted the post-Civil War speculative bubble. The Coinage Act of 1873 also contributed by immediately depressing the price of silver, which hurt North American mining interests.

President: Ulysses S. Grant (R)

Panic of 1857
1857 - 1860

Failure of the Ohio Life Insurance and Trust Company burst a European speculative bubble in United States railroads and caused a loss of confidence in American banks. Over 5,000 businesses failed within the first year of the Panic, and unemployment was accompanied by protest meetings in urban areas.

President: James Buchanan (D)

Panic of 1837
1837 - 1843

A sharp downturn in the American economy was caused by bank failures and lack of confidence in the paper currency. Speculation markets were greatly affected when American banks stopped payment in specie (gold and silver coinage).

President: Martin Van Buren (D)

Panic of 1819
1819 - 1824

The first major financial crisis in the United States featured widespread foreclosures, bank failures, unemployment, and a slump in agriculture and manufacturing. It also marked the end of the economic expansion that followed the War of 1812.

President: James Monroe (I)

Depression of 1807
1807 – 1814

The Embargo Act of 1807 was passed by the United States Congress under President Thomas Jefferson. It devastated shipping-related industries. The Federalists fought the embargo and allowed smuggling to take place in New England.

President: Thomas Jefferson – James Madison

Panic of 1797
1793 - 1800

The effects of the deflation of the Bank of England crossed the Atlantic Ocean to North America and disrupted commercial and real estate markets in the United States and the Caribbean. Britain’s economy was greatly affected by developing disflationary repercussions because it was fighting France in the French Revolutionary Wars at the time.

President: George Washington

Sources
U.S. Department of Commerce: Bureau of Economic Analysis

http://www.bea.gov/national/xls/gdplev.xls