This article looks at the biggest recessions from the past century, what led them to occur and, following recent crashes caused by the coronavirus pandemic, if there are any warning signs that could arguably lead us into a new recession, or worse, a new great depression.
(Source: Paul Pichota)
There have always been some key indicators that have led to previous market recessions. This section looks over the biggest recessions from the past century, what happened and why.
1929 The Great Depression
After the first World War, Western economies experienced 'the Roaring Twenties', a decade of economic growth and widespread prosperity which was driven by wartime recovery, deferred spending, a construction boom, and the rapid growth of consumer goods like automobiles and electricity. This also led to many individuals having excess cash to invest in stock markets, which was an easy way to acquire more wealth back then.
On October 24th 1929, 'Black Thursday' started. Following the opening bell, markets dropped 11% that morning. The following week, 'Black Tuesday' saw the Dow Jones fall an additional 12%, a market decline of $14 billion (Investopedia, May 2019). The Dow fell for an additional 3 months following this. In the US, unemployment reached the highest in its history at 24.9% (The Balance, Feb 2020), banks closed and money was worth a tenth of what it was. Years of debt-fuelled speculation led to the worst economic downturn in the history of the industrialised world.
The below graph shows income per person for various countries during the Great Depression. It interestingly also shows at what stage each country abolished the gold standard:
1987 Stock Market Crash
In the early morning of October 19th 1987, panic erupted in Tokyo when the Dow Jones dropped again, this time 508.32 points. The London Financial Times Index dropped 183 points (the biggest drop in UK history), and the US markets fell more than 20% in a single day (Finance Monthly, Oct 2017).
Many indicators meant that analysts predicted 'Black Monday' was an accident waiting to happen. A few of these indicators included the precipitation of computer program-driven trading models, dodgy portfolio insurance strategies and investor panic.
Other indicators included renewed inflation fears on the decline of the dollar, rising interest rates, and huge budget and foreign trade deficits. Many stressed that the world was living beyond its own means for too long. The below graph shows the NASDAQ fall and decline during the 1987 stock market crash:
2001 Dot-com Crash
The late 1990s was a period of massive growth in the adoption of the internet. Investors had a big drive to invest in the technology companies that were going to revolutionise the future. Years of this debt-fuelled speculation came to a halt when most of these companies were actually shown to be worthless. The dot-com bubble started in 1997, peaked in 2000 and ultimately burst in 2002.
On September 11th 2001, the World Trade Centre attacks also contributed to sharp global stock market drops. The attacks themselves caused approximately $40 billion in insurance losses, making it one of the largest insured events ever (Insurance Information Institute, September 2019).
The collapse of the dotcom bubble, the 9/11 attacks, and other accounting scandals at major U.S. corporations, all contributed to this fall. In the grand scheme of things, this drop wasn't too bad. In the next few months, GDP generally recovered to its former level. The below graph shows the NASDAQ fall and decline during the 2001 Dot-com Crash:
On October 11th 2007, the worst stock market crash since the Great Depression happened. From October 2007, until their closing lows in early March 2009, the Dow Jones, NASDAQ and S&P 500 all suffered declines of over 50% (Paul Mueller, 2018).
There were many reasons for this crisis. The blame lay with many levels of financial institutions, regulators, credit agencies, government housing policies, and consumers. Two of the biggest indicators that led up to the crash were the rise in subprime lending and the increase in housing speculation.
On September 16th 2008, the failure of large financial institutions in the US rapidly turned it into a global crisis. This was primarily due to the exposure of securities of packaged subprime loans and credit default swaps issued to insure these loans (The Balance, December 2019)
Years of debt-fuelled speculation from borrowers was based on absolute rubbish once again. This resulted in bank failures in Europe and sharp reductions in the value of stocks and commodities worldwide.
Here is a chart showing the full 517 days of the 2008 financial crash vs the 21 days of the recent 2020 coronavirus crash:
(Source: Jack Chapple)
Current Recession Indicators
A recession means that an economy isn’t growing and two basic signs to measure a faltering economy are; a country's GDP, and published quarterly economic data. It'll be worth monitoring these as the coronavirus grows to give you a better indication of how economies are coping with a longer-term shutdown.
There have been many big events that have led us into previous market recessions and we'd be foolish to disregard the lessons that they taught us. The Coronavirus pandemic is something new but there are some commonalities. This section looks at what's going on in markets and global economies now and identifies the new warning signs.
China is the number one manufacturing nation in the world with approximately one-third of global products being made there (Brookings, July 2018). If China starts to shut down, the entire world would start working on a delay. With China showing no signs of COVID 19 diminishing within its population, the supply chain slowdown would have a predictable knock-on effect with companies around the world, who will eventually have nothing to sell.
As an example, car companies that have their supply chain dotted all around the world could face manufacturing delays of up to 3 months so far (Fortune, March 2020). Not being able to release new cars to the public will have significant repercussions on earning billions in sales, not just over the next year, but over the next decade to come. The 'stay-at-home' attitude is keeping people's health safe, but this also leads to a massive decline in spending and luxury expenditures. In China, for example, the lockdown has lead to a massive 80% drop in automobile demand (Bloomberg, March 2020).
This effect trickles down to all levels of any supply chain. If there is no demand for products, there is no demand for parts, and there is no demand for the materials needed to make them. To compensate for this, companies will lay off employees and make giant cuts. This ultimately leads to big indicators of failing economies; higher unemployment rates, less consumer purchases and few sales being made by businesses. If this was felt in every single industry, this could decline until we reach a new market low, leading to a new recession, or perhaps, even a new great depression.
In many ways, economies nowadays resemble those of the Great Depression era. Key alarming indicators include; the wealthy becoming more wealthy, the middle-classes disappearing, household and national debt at an all-time high, young families not affording to own a home, rents skyrocketing and unskilled or semi-skilled workers being replaced with automation (The Street, July 2019).
Some analysts have predicted that the unemployment rate could reach over 30% due to this pandemic, topping the Great Depression peak of 24.9% (CNBC, March 2020). Economic indicators are higher today than ever before, so it is reasonable to think that a recession is reasonably likely at some point. On March 9th 2020, markets experienced 'Black Monday', the fastest 30% market decline in economic history.
During March 2020, the S&P 500 declined around 36% and the Dow Jones Industrial Average has declined 38.5%. Some market indicators are very prevalent now, but we never know where these downward trajectories could end up. Investors really need to think about safeguarding themselves with real, tangible assets. Gold and silver have been a classic hedge for economic uncertainty and now is a great time to insure your finances with physical value. Call us on 01769 618618, email [email protected] to discuss your precious metal options or order through the website today.