Not only are the risks of a recession rising, but there are also worrisome parallels today with the era of the Dotcom Crash that ran its course from 2000 to 2002. In particular, the Dotcom Bubble that preceded the crash was the result of soaring valuations for technology stocks against a background of brisk economic growth and falling unemployment. This scenario also fits the current bull market, observes Erik Ristuben, global chief investment strategist at Russell Investments, as reported by Business Insider. The table below shows the length of the five most recent U.S. recessions.
U.S. Recessions Vary In Timing & Duration
- 2007 to 2009: 18 months
- 2001: 8 months
- 1990 to 1991: 8 months
- 1981 to 1982: 16 months
- 1980: 6 months
Source: National Bureau of Economic Research (NBER)
Significance For Investors
The Dotcom Bubble was a speculative frenzy surrounding technology companies, especially those that promised to reap huge profits from the internet, which was still in its infancy. The crash unfolded as these expectations began to unravel, with growing numbers of these new tech companies reporting mounting losses, or even going out of business not long after their IPOs.
During the course of the Dotcom Crash, which ran from March 2000 to October 2002, the Nasdaq Composite Index (NDX) plummeted by 78%, and the S&P 500 Index (SPX) shed 49% of its value. This severe bear market decline in stock prices was already underway when the U.S. economy slipped into a recessionary contraction that lasted from March to November of 2001.
Erik Ristuben notes that the stock market historically is a fairly reliable predictor of an impending recession. While not every significant decline in stock prices has been followed by a recession, he adds that every recession in recent history has indeed been preceded by a stock market selloff. Since World War II, he finds that, on average, a U.S. recession has begun six months after a market peak, and never longer than 12 months thereafter. The Stock Market Crash of 1987 is a notable example of a bear market decline that neither was triggered by a recession, nor preceded one.
Based on his reading of history, and given the 14% drop in S&P 500 during the final quarter of 2018, Ristuben expects the next recession to begin by 2020. But, he expects it to be "very mild," similar in length and depth to the eight-month contraction in 2001, which occurred in the midst of the Dotcom Crash.
Meanwhile, a net 60% of the leading global fund managers surveyed by Bank of America Merrill Lynch earlier this month expect global economic growth to weaken this year, though only 14% expect a recession to begin in 2019. Nonetheless, this is the most pessimistic outlook registered by this monthly survey since July 2008, shortly before the financial crisis, and it is even gloomier than the previous low set in January 2001, right before that year's recession, BofAML notes. "GDP & EPS optimism has crashed," the report observes.
As noted above, even a relatively mild recession such as that experienced in 2001 may accompany significantly more severe, and longer-lasting, stock market declines. Additionally, also as discussed above, continued economic growth is no guarantee that stock prices will continue to climb as well.