This is Part-2 of a two-part series. To find Part-1, click here.
Last week, we discussed the Ned Davis Research Global Recession Indicator and how it’s been unbelievably accurate since 1970…until last year, when it forecasted a recession that never came to fruition. We also discussed the fact that we’re living in year-9 of the current bull market, which arguably began in early-2009 – and that market crashes take place every 7 years, on average, with an average loss of just under -42%. Now, let’s take a look at what could end up making the 2010’s a true “decade of firsts.”
Speaking specifically of economic recessions (not stock market crashes, which prelude recessions) if the economy can manage to make it through the next 2 ½ years, this will have been the first decade in history wherein the economy doesn’t experience a recession.
Source: Crestmont Research
What most people don’t realize is how often recessions actually take place. As you can see in the graph below, prior to 1930, recessions took place on a regular basis. In fact, 25% of the time, the economy experienced decades in which there were four recessions all within a 10-year period. When we observe the data since 1930, however, recessions have still taken place once-per-year, on average, roughly 1/3 of the time – and we can observe two recessions taking place within a decade about 2/3 of the time.
Source: Crestmont Research
In fact, while we’re living in the 2nd longest stock bull market in history, as you can see in the data below, we’re also living in the 3rd longest economic expansion in history. If we make it through May of 2018, we’ll be living in the 2nd longest expansion – and if we make it past July of 2019, this economic expansion will take home the gold and potentially even lead us out of the 2010’s without a recession at all.
What is the likelihood of this happening? No one really knows. Any investor should be focused on the price of the investments they own and if they’re wise, they should have an exit strategy to get out when the going gets tough (as opposed to watching your financial house burn down while you’re inside).
As Crestmont Research reports, “The current long expansion has come at great cost. Had this expansion simply grown at the historically-average rate, the economy, standards of living, and average worker incomes would be more than 20% higher than they are today. No wonder we have a current environment of economic frustration.”
To finish up this two-part article without a statistic regarding the stock market? Well, that just wouldn’t be right. So feast your eyes on the table below, which lists all the stock market drawdowns, organized by U.S. President in their inaugural year serving in office. Notice anything interesting about each president’s first year? You got it – they’re all negative.
So with all those numbers behind us, it’s safe to say, “It’s early yet.” The stock market has done well in this inaugural year thus far, but there is a good 7 ½ months left to go. I expect we’ll see some sort of mean reversion this summer where the markets struggle and pull back. It’s only healthy, especially considering how fast the market has risen over the last six months.
However, all of the trends I follow are currently positive with very few signs of weakness. For my fellow nerds reading along, there have been some negative momentum divergences in a few indicators, but this is the source of my opinion on why I think we’ll see the market give back some profits this summer. In other words, I don’t see anything in the intermediate or long-term picture at the moment that warns of imminent disaster.
While the market and economy look to be improving, as the saying goes, “Anything can happen.” No one can predict the markets. With all that said, we’ll keep our exit strategies in place with our finger on the eject-button in the case profits start to evaporate in the coming weeks. For those of you managing your own, hard-earned retirement dollars I’d recommend you do the same, along with keeping focused attention on your financial plan.
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The opinions mentioned in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial adviser and strongly consider interviewing a fee-only financial advisory firm, prior to investing. Past performance is not guarantee of future results. Economic forecasts set forth may not develop as predicted. The views and opinions expressed in this commentary are those of Adam D. Koos, CFP® and do not necessarily represent the views of TD Ameritrade and its affiliates. Investing involves risk including loss of principal.