This is the longest period of economic expansion in U.S. history and the economy continues to grow at a moderate rate. Does this record-setting expansion carry some special meaning? Does it signal a looming recession? If a recession is near, how might it affect stock prices?
In the first part of this article we will examine the economy. In the second part we will look at stock price movements before, during, and after the past 14 recessions.
Econ 101
The U.S. economic cycle is divided into four steps as follows:
- Growth (Recovery)
- Peak
- Contraction (Recession)
- Trough
The Longest Expansion in U.S. History
The following chart (Exhibit 1) shows the number of days between each recession from October 1928 to the present. For example, the most recent recession ended 5/31/2009 (left axis at bottom). Since then, as of June 13, 2019, 3,665 days or 10 years have elapsed. The previous record was 3,654 days between the 1991 and the 2001 recessions.
It is interesting to note how periods of expansion have lasted much longer in the past 50 years. For example, the average length of an economic expansion from the Great Depression to the recession ending January 31, 1961, was 1,397 days or about 3.8 years. From the recession that ended October 30, 1970 to date, the average expansion has lasted 2,350 days or about 6.5 years. This is a discussion for another time.
Exhibit 1
While the length of this expansion is remarkable, does it hold any significance? Does the duration of an expansion have predictive value? Should we be concerned about a looming recession based on the extended period of growth we are experiencing? The short answer is "probably not." Although each day brings us closer to the next recession, it's more important to focus on what the economic indicators are telling us.
Positive Signs
The economy has slowed a bit in recent months, which is not unusual as it ebbs and flows. But we need more data to identify a trend. Here's a look at GDP, unemployment, inflation, and the Fed.
- GDP was 3.1% (y/y) in Q1 2019, up from 2.2% in Q4 2018, after adjusting for inflation (real GDP). Before inflation, GDP was 3.6% (nominal GDP).
- Unemployment was 3.6% in April and May. You have to go back to December 1969 to find a lower reading (3.5%).
- Inflation was 1.8% (annualized) in May. There's no sign the economy is overheating.
- The Fed is considering rate cuts in 2019. Many believe the rate hike in December 2018 was a mistake. Regardless, an easy monetary policy is a welcome sign for investors.
There are additional positives we could cite, but we'll leave it there for now. There is no doubt there will be another recession. However, we do not know when it will occur or its magnitude.
Recessions and Stocks
Before we discuss how stocks typically react to a recession, it should be noted that stock prices may rise or fall when the economy is strong. Therefore, the strength of the economy does not always indicate how stocks will perform. That said, perhaps the single most important issue for investors at this time, is how stock prices react when the economy contracts. Below is a series of charts covering the past 14 recessions. The stock market (the Dow) is represented by the blue line and periods of recession are shaded grey. The charts also show the decline in GDP during each recession. They are labeled A-E and span the period from October 1928 through June 11, 2019. Note how stock prices moved prior to, during, and after each recession. See if you can identify any trends.
Period: October 28, 1928 to December 31, 1949
Period: January 1, 1950 to December 31, 1975
