Comparing Bear Markets
I was given some data last week that compared the length and impact of the current financial crisis as reflected in the Standard and Poor's 500 Index. Before you scroll right to the bottom of the post and lambast me in the comments section for such a narrow focus, give me a chance to put in some context.
The S&P 500 is considered by many to represent "The Market" in the United States. Over 70% of the country's publicly traded companies are tracked in the index. So while the S&P does not measure general prosperity, misery indices such as unemployment and inflation, and other key factors such as GDP, it does reflect broadly the health of the economy.
Before the current recession, there have been fourteen other recessions since the Great Depression. Of those fourteen, only four have lasted longer than two years. The average length of recession in this time period has been 19 months....a little over a year and a half.
Source: Renaissance, S&P Equity Research
Although this chart is current through the third quarter of 2008, it is probably a safe assumption that we have not pulled out of recession yet, meaning we are finishing up with month 16 now. By modern historical standards, the length of this recession is approaching the average.
Examining the same market events, the S&P index has declined, on average, 38% in these recessionary periods. While only five of the fourteen events have declined more than 38%, our current recession has already passed this average. And that was as of October 2008 - we're down even further since then.
Source: Renaissance, S&P Equity Research
So, we are in a recession that, thus far, has been shorter then the average recessions we have experienced since the Great Depression but, despite the fact that we are not long into it, we have already surpassed the average loss of those previous recessions. The following chart shows this time/loss relationship in direct comparison.
Source: Renaissance, S&P Equity Research
Is there a conclusion we can draw from this? Probably not directly, but it reinforces a couple of notions I have heard expressed by people I find to be informed and intelligent. First, we still have a long way to fall before we find bottom and, second, it should be no surprise if this lasts quite a bit longer.
I'm a relatively young man (I just slipped out of the coveted 18-34 age demographic) and, while I lived through the dot.com bust and post-9/11 recession (one of the bad ones, by this analysis), my life has generally been one surrounded by prosperity. It seems like we, as Americans, have made an historic shift this time in how we look at ourselves, our economy and our way of life. Even when the economy stabliizes and begins to recover, I don't expect people will go back to the "normal" we have known over the last two decades.
If that is true, we have a new reality. What does this mean for small towns and rural areas? I think in the near term we can count on less government subsidy (there won't be as much to pass around) and less tolerance from urban/suburban office-holders to fund the "rural lifestyle". If that is so, the world has shifted, and those of us who care about small towns need to recognize this and get ahead of it.
So now, if you believe Adam Smith is rolling over in his grave with this simplistic analysis, feel free to offer your thoughts in the comment section. I seriously would enjoy additional takes on this because I'm a planner/engineer, not an economist.