Lessons from Prior Economic Recessions for the American Investor

What does it mean to be an American investor today? It means you are tough, resilient, and resourceful. There seems to be an ever-constant barrage of negative headlines in the news with no reprieve in sight.

How does one make sense of all the news and the changes in the markets? How do you navigate the seemingly limitless issues that could adversely affect returns and affect your future?

These are the questions that you face routinely. It’s exhausting, no doubt. But these headwinds are no match for the American investor.

Investor trading sentiment has been on a steady incline since March 20, 2020, according to the “Daily Trading Sentiment Composite.” Meaning that even in these times of extreme uncertainty, American investors have not wavered in their confidence in the U.S. economy and their ability to harvest returns.

There are different opinions from industry professionals and reporters on why this is. For example, Quinten Fotrell of MarketWatch writes that markets have been propped up by stimulus and legislation – “mere band-aids.”

Others, like Barry Glassman from Forbes, say market performance is attributed to a mass influx of spending in the economy and liquidity in the market via extremely “high purchase volume of bonds and other instruments by the trillions.”

And then there is another camp that says the greatly increased participation of intraday trading through platforms like Robinhood play a significant role in recent market performance. Trade volume hit $14.6 trillion in March, double the volume a year earlier.

Which explanation of recent market performance is the truth? These are the kind of difficult questions the American investor is tasked with sorting through daily. The tough truth is that all three schools of thought on recent market performance are legitimate, and all three are contributing to market performance to some degree.

So regardless of which perspective you subscribe to, it is a lot to unpack. Something is for certain, however. There has never been an economic downturn, recession, pandemic, social unrest, election, or war that the American investor did not come out on the other side of, if not stronger, then smarter.

The late philosopher George Santayana famously said, “Those who cannot remember the past are condemned to repeat it.” Let’s look back at two fairly recent times that the economic future was bleak, but the American investor emerged.

80s-Style Recessions

The first event – or events, in this case – are the recessions in the early 1980s. Particularly the two recessions back to back between 1980-1982. They are interesting examples to look back on because there are so many similarities to the current economic recession the American investor is facing now.

The Iranian Revolution and the ensuing Energy Crisis of 1979 underpinned the recession in the early 80s. This disrupted global oil supplies and subsequently oil prices skyrocketed. These events are an interesting contrast to today when almost the exact opposite has occurred in the oil industry.

The Russia-Saudi Arabia oil price war has driven oil prices into the ground. COVID-19, on the coattails of the price war has slashed demand, further negatively affecting oil prices. But the result is nearly the same in both the 80s and now: increasing unemployment, especially in the energy sector, accompanied by decreasing GDP.

Another driving factor in the 1980s recessions was high inflation rates. The Federal Reserve responded to this by raising interest rates which substantially prolonged the economic recession. Compare that to today where inflation is extremely low, and the Federal Reserve has responded by lowering interest rates to all-time lows to try and stimulate economic growth. The recession of the early 80s ended in 1982 after President Reagan cut taxes and increased military spending. The S&P 500 saw a 48% increase from August 1982 to August 1983.

What We Learned

The biggest takeaway that many American investors took from the recession of the early 80s was that the trends and sentiment of the Fed are critical metrics to follow when considering investing. American investors also learned that, generally, for all economies to do well, the energy business needs to do well.

This is a great example of the continuing notion that the American investor finds a way to capitalize on opportunity, and there has historically always been an opportunity upon which the American investor can capitalize.

The Recession that Ruled Them All 

In more recent memory, an example of an economic downturn where the American investor not only survived but came out with new knowledge and opportunity is the Great Recession of 2008-2009.

This was the second-longest and the most severe economic downturn in American history. The recession happened for a multitude of reasons, however, it was triggered by the subprime mortgage crisis. Banks offered loans to generally under-qualified borrowers and then sold these loans to mortgage-backed security brokers that were then selling them on the secondary market. When the original borrowers started to default on these loans in mass, the people who bought the mortgage-backed securities could not get out of them quickly enough and thus triggered a massive domino effect throughout the entire U.S. economy.

Like the recession in the early 1980s, between March of 2009 and March of 2010, the S&P 500 gained 52%. Another large bounce-back off the bottom. This bounce-back is something the American investor has seemingly become adept at and can be viewed as a true testament to the American investor’s resilience.

What We Learned 

There were two big takeaways from The Great Recession.

The first is that the adage of “buy and hold” might not be the appropriate strategy moving forward. We are potentially seeing the flip side of that coin now, with such an increased volume of trading and the consequences of that being increased nominal volatility.

The other big lesson that can be taken away is not to go too crazy for one particular investment tool, i.e., mortgage-backed securities.

The Tunnel’s End

There’s always light at the end of the tunnel in terms of economic downturns and recessions, even if the negative news cycle seems to be never ending.

This latest recession seems unprecedented, and in many ways, it is. But so was every other economic circumstance that led to previous recessions. We don’t know what set of circumstances will lead to market volatility, but we know it will find us again.

There will be lessons and tools to take from this 2020 recession that can be applied to the next economic crisis that poses a threat to American investors. Those newfound tools and knowledge might help mitigate future losses and give a better perspective on what to do going forward at that time.

The most certain of all certainties is that you, the American investor, are tough, resilient, and resourceful.

How can we help you put together a financial plan that is tough and resilient?

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