US Stock Market Downturns & Recessions (1)

8/7/2019 US Stock Market Downturns & Recessions (1)

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US Stock Market

downturns/recessionsPresented by: Kipley Pereles


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What defines a Recession? GDP vs. NBER

` Traditional Definition: Many economists look for two back-to-back quarters of negative GDP/real economic growth to

define a recession.

` The National Bureau of Economic Research (NBER) is theofficial arbiter of recessions.

` Actual Definition: A significant decline in economic activity

spread across the economy, lasting more than a few months,normally visible in realGDP, realincome, employment,

industrial production, and wholesale retail sales."


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S&P 500 Performance Pattern Around Recessions

Average Duration ofa Recession

Indexed price-only data from 1947-March 31, 2002. Source: Ned Davis Research, Inc., The Schwab Center for

Financial Research

The chart above combines all of the 10 prior recessions into a single averageline.

The market typically peaked about seven months before the recession began,

but bottomed six months into (or 60% of the way through) the recession, with

an average peak-to-trough decline of just under 25%.


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The Big Picture

Source: Crestmont Research (www.CrestmontResearch.com)


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For most of the mid-2000s, volatility had been unusually lowand by late 2006 andearly 2007, volatility fell into the lowest three percent of all periods since 1950.

Then a few years ago, volatility surged to startling levels.Measured by the frequency of days each month that close up or down by more than

1% and the intra-day range expressed as a percentage.


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What was the Great Depression of 1929?

` Its kickoff in the U.S. economy was Black Thursday, October 24, 1929,when 12.9 million shares of stock were sold in one day (triple the normal

amount).Share prices fell 15 - 20%, causing a stock market crash.

` Cause: Tight monetary policies that the Federal Reserve instituted at thattime. Fed kept raising the Fed Funds Rate& IRs, further restrictingavailability of money. Allowed the money supply to fall to 30%.

` Investors turned to the currency markets & sold dollars for gold, causing arun on the dollar.

` What brought it to an end?

` Franklin Delano Roosevelt was elected President (created Fed Govtprograms)

` 42 new agencies were designed to create jobs, allow unionization, andprovide unemployment insurance (ex: Social Security,SEC, FDIC)

` Mobilization for World War II caused a huge increase in industrialproduction

` Lasted 10 years


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The Great Depression

Source: www.marketoracle.co.uk/ima es/1929-stock-mark...


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The National Bureau of Economic Research (NBER) is the recognized arbiter of U.S.recession dates. The NBER has identified 9 recessions in the U.S. since 1953, with an

average duration of 11 months, not including the most recent 08-09 recessionary

period.

The positive takeaway here is that the general long-term stock market trend is UP.

How The Economic Cycle & The Stock Market Are Linked

Source: Vanguard


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Bank failures9,096 50% of banks

(Jan. 1930 March 1933)

184 1.2% of banks

(Dec. 2007 Feb 2010)

Unemployment rate 25% 8.5%

Economic decline-26.5%(1929 - 1933)

-3.3%(SSecond quarter 2008 - first quarter 2009)

Biggest decline in Dowones industrial average

-89.2%(Sept. 3, 1929 July 8, 1932)

-53.8%(Oct. 9, 2007- March 9, 2009)

Change in prices-25%(1929 1933)

+0.5%(Dec. 2007-March 2009)

Emergency spendingprograms

1.5% of GDP for 1 year(Increase in 1934 budget deficit)

2.5% of GDP for 2 years(2009 American Reinvestment and Recovery

Act)

States response Raise taxes, cut spending

Federal stimulus plan gives fiscal relief to states

to lessen impact of tax increases

Increase in money supplyby Federal Reserve

17%(1933)

125%(September 2008 May 2009)

Great Depression Great RecessionVs.

Source: FDIC, Federal Reserve; Commerce Department; Dow Jones; Christina Romer, Obama economic adviser, Lessons from the Great

Depression for Economic Recovery in 2009 (March 9) and JEC testimony


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How quickly we recover


11/13

Real GDP Growth by Presidential Party


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More Current Depiction of Upward Stock Market Trend


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Sources

` The Schwab Center for Financial Research

` Crestmont Research

` www.marketoracle.co.uk/images/1929-stock-mark

` About.com; Yahoo.com ; Vanguard.com

` FDIC, Federal Reserve; Commerce Department; Dow Jones; ChristinaRomer, Obama economic adviser, Lessons from the Great Depression forEconomic Recovery in 2009 (March 9) and JEC testimony

` Ned Davis Research, Inc.

` http://www.fdic.gov/bank/individual/failed/banklist.html

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US Stock Market Downturns & Recessions (1)