�??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 7 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. Let�??s take a look at a few for example:
1973-1974 Stock Market Crash and 1973 Oil Crisis (1973-1975) lasting 2 years
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In the 694 days between January 11, 1973 and December 6, 1974, the Dow Jones Industrial Average benchmark lost over 45% of its value.1
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The unemployment rate jumped from the 5% level to nearly 9% in about a year and a half.2
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The Arab members of OPEC declared they would no longer ship oil to the United States and other countries if they supported Israel.3
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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 $12.00.4
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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 1974.5
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The New York Stock Exchange shares lost $97 billion in value in six weeks.6
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Inflation jumped from 3.4% in 1972 to 12.3% in 1974.7
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The unemployment rate reached 10.8%.8
Bank failures reached a high of 42, and in the first half of 1983 an additional 27 banks failed.9 -
In 1984, the Continental Illinois National Bank and Trust Company, the nation's seventh-largest bank failed. Members of Congress felt
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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.10
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415 savings and loan associations in the US failed.11
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In 1979 inflation reached 13.3%7 and the Prime lending rate jumped to 21.5% by December 1980.12
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By 1989, over half the Savings and Loan banks had failed, along with the FSLIC fund that was created to insure their deposits.13
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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.14 -
The NASDAQ lost 78% of its value following the collapse of the Dot-com bubble.15
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From March 2000 to October 2002 technology companies lost $5 trillion in market value.16
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After the September 11, 2001 terrorist attacks the Dow Jones Industrial
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Average suffered its worst one-day point loss and biggest one-week losses in history up to that point.17
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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 (usually 6 months before the end of the resession) and that on average, the stock market earns 38.6% in the 12 months following the trough, or bottom, of the market.
Of course, no two recessionary periods are exactly alike. Some were driven by equity market bubbles, significant corporate earnings deterioration or oil price shocks. And 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. Unless we find an unusually accurate crystal ball, it is important to maintain a broad asset allocation in your plan to survive, and ultimately thrive, through a recession and post-recessionary market.
Sources
1 finance.yahoo.com/q/hp?s=%5EDJI&a=00&b=11&c=1973&d=11&e=6&f=1974&g=d
2 www.bls.gov/cps/cpsaat1.pdf
3 state.gov/r/pa/ho/time/dr/96057.htm
4 wtrg.com/prices.htm
5 eia.doe.gov/emeu/aer/txt/ptb0524.html
6 latimesblogs.latimes.com/uptospeed/2008/07/the-gas-crisis.html
7 ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt
8 nytimes.com/2009/01/10/business/economy/10jobs.html
9 www.fdic.gov/bank/analytical/firstfifty/chapter1.html
10 www.fdic.gov/bank/historical/managing/history2-04.pdf
11 www.fdic.gov/bank/historical/history/167_188.pdf
12 wsjprimerate.us/wall_street_journal_prime_rate_history.htm
13 useconomy.about.com/od/grossdomesticproduct/p/89_Bank_Crisis.htm
14 www2.standardandpoors.com/spf/xls/index/sp500pe_ratio.xls
15 investopedia.com/features/crashes/crashes8.asp
16
qctimes.com/articles/2006/07/17/news/business/doc44bb0a1ab97ce159604273.txt
17 crn.com/it-channel/18815610
If you have any questions or would like to discuss how you can benefit from this situation please feel free to give Eric a call at 603-391-0512.
Eric Ellis CRPC(R)
Financial Advisor
Ameriprise Financial Services, Inc.
5 Bedford Farms, 3rd Floor | Bedford, N.H. 03110
Office: 603.668.1273 Ext. 512| Fax: 603.668.1304
Direct: 603.391.0512 | Mobile: 603.520.1216
Eric.M.Ellis@ampf.com
ameriprise.com
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