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The crisis currently facing economies worldwide, including that of the US, is unprecedented in its causes and the many uncertainties arising from it. However, looking back at past recessions may provide us with some keys to better understand the current recession.

Facing the uncertainties of an unprecedented crisis

March 2020 will be etched forever in the memory of investors as the month of extremes in terms of its economic, social, financial and stock market aspects.

For the stock market, March will prove to be the month in which the US stock market recorded its biggest decline since the Great Depression of 1932.

Meanwhile, on March 24, the US Congress’s announcement of the launch of tax measures totalling nearly $2 trillion injected fresh hope on the market. On that single day of March 24, the Dow Jones Industrial Average gained over 11% to record one of its strongest daily historical gains, while the S&P 500 saw its strongest rise in 12 years.

On the economic data front, the picture is not much better. Key US manufacturing and services indicators have begun to decline sharply, underlining the magnitude of the current pandemic and the resulting crisis.

It is already obvious that the economic contraction we are seeing will be intense and will last for at least one financial quarter, perhaps longer.

Natural epidemics, like the one we are now experiencing, do not fit into any macroeconomic model. The outcome is therefore difficult to anticipate: growth might resume rapidly once the health crisis ends or the contraction could continue for a longer period. Nobody can say.

A critical variable for economic recovery and the dynamics of world trade will be the extent of the damage on company balance sheets caused by the containment measures; another crucial factor will be the authorities’ ability to prevent lasting damage to the labour market.

Recessions becoming less and less violent?

Rather than trying in vain to guess the extent of the decline in US GDP in 2020, it is perhaps more reasonable to examine the impact of historical declines in GDP on the markets. This might give us a better market perspective.

For each period of US recession since 1836, the table below details its duration and the resulting fall in GDP.

Name

Date

Duration

GDP/business activity "from peak to end"

Great Recession

Dec 2007 - June 2009

1 year, 6 months

-5.10%

Early 2000s recession

Mar 2001 - Nov 200I

8 months

-0.30%

Early 1990s recession

July 1990 - March 1991

8 months

-1.40%

1981- 1982 recession

July 1981 - Nov 1982

1 year, 4 months

-2.70%

1980 recession

Jan 1980 - July 1980

6 months

-2.20%

1973- 1975 recession

Nov 1973 - Mar 1975

1 year, 4 months

-3.20%

1969 - 1970 recession

Dec 1969 - Nov 1970

11 months

-0.60%

1960 - 1961 recession

Apr 1960 - Feb 1961

10 months

-1.60%

1958 recession

Aug 1957 - Apr 1958

8 months

-3.70%

1953 recession

July 1953 - May 1954

10 months

-2.60%

1949 recession

Nov 1946 - Oct 1949

11 months

-1.70%

1945 recession

Feb 1945 - Oct 1945

8 months

-12.70%

1937 - 1938 recession

May 1937 - June 1938

1 year, 1 month

-18.20%

Great Depression

Aug 1929 - Mar 1933

3 years, 7 months

-26.70%

1926 - 1927 recession

Oct 1926 - Nov 1927

1 year, 1 month

-12.20%

1923 - 1924 recession

May 1923 - June 1924

1 year, 2 months

-25.40%

1920 -1921 Depression

Jan 1920 - July 1921

1 year, 6 months

-38.10%

Post-World War I recession

Aug 1918 - Mar 1919

7 months

-24.50%

1913 - 1914 recession

Jan 1913 - Dec 1914

1 year, 11 months

-25.90%

1910 - 1911 panic

Jan 1910 - Jan 1912

2 years

-14.70%

1907 panic

May 1907 - June 1908

1 year, 1 months

-29.20%

1902 - 1904 recession

Sept 1902 - Aug 1904

1 year, 11 months

-16.20%

1899 - 1900 recession

June 1899 - Dec 1990

1 year, 6 months

-15.50%

1896 panic

Dec 1895 - June 1897

1 year, 6 months

-25.20%

1893 panic

Jan 1893 - June 1894

1 year, 6 months

-37.30%

1890 - 1891 recession

July 1890 - May 1891

10 months

-22.10%

1887 - 1888 recession

March 1887 - April 1988

1 year, 1 month

-14.60%

1882 - 1885 recession

March 1882 - May 1885

3 years, 2 months

-32.80%

1873 panic & the Long Depression

Oct 1873 - March 1879

5 years, 5 months

-33.60%

1869 - 1870 recession

June 1869 - Dec 1858

1 year, 6 months

-9.70%

1865 - 1867 recession

April 1865 - Dec 1867

2 years, 8 months

-23.80%

1860 - 1861 recession

Oct 1860 - June 1861

8 months

-14.50%

1857 panic

June 1857 - Dec 1858

1 year, 6 months

-23.10%

1853 - 1854 recession

1853 - Dec 1854

1 year

-18.40%

1847 - 1848 recession

late 1847 - late 1848

1 year

-19.70%

1845 - late 1846 recession

1845 -1846

1 year

-5.90%

1839 - late 1843 recession

1839 - 1843

4 years

-34.30%

1836 - 1838 recession

1836 - 1838

2 years

-32.80%

Source: Wikipedia and Robert W Baird Limited

 

Over the past 75 years, there have been 11 recessions; the one related to the 2008 financial crisis was the most severe, with a 5.1% decline in real GDP in the United States.

From 1882 to 1945, 18 recessions occurred in succession, all of which resulted in double-digit declines in real GDP, with half of them exceeding a 25% drop in GDP!

But the reality is that, since the end of World War II, the effect of recessions on GDP has been relatively moderate. This is largely due to the intervention of central banks, notably the Fed, but also to the effects of globalisation, technological advances and increasingly powerful fiscal and monetary tools.

Of course, the extent of the current recession will depend above all on when we are able to stem the spread of the Covid-19 virus and thus ease the restrictive measures weighing on our economies.

Could the decline be as extensive as that in 2008 (a -5.1% drop in GDP)? Yes, especially as the current level of GDP is higher than in 2008.

Will it be as severe as that systemic banking crisis, which has seen the slowest economic recovery ever recorded? Probably not, especially given the central banks’ current determination.

Or will we see a short-lived recession with a rapid recovery (8 months) like the one that marked the year 1945?

Many questions, few answers...

Focus on companies with strong fundamentals

While we cannot know the extent of the decline or the pace of recovery, we can control some of the risks we take by being selective in our investments. That's why we believe that it is more important than ever to focus our investments on quality companies with strong balance sheets, low debt and high liquidity.

This context chimes with what John Donahoe, Nike's CEO, said when releasing his latest quarterly results on March 24: "We know in times like these that STRONG BRANDS GET EVEN STRONGER and I truly believe that no one is better equipped than NIKE to navigate the current climate."

As a long-term investor, this is a statement that makes a lot of sense and one we would do well to remember. Numerous studies show that the existence of a major competitive advantage (in the specific case of Nike, this is a loyal customer base and a strong affinity for the brand) is a strong guarantee for the creation of long-term shareholder value.

Financially, we expect these "quality" companies to have all the following characteristics: high profitability and return on invested capital ratios, strong free cash flow generation and steady earnings growth over economic cycles.

These are strict investment criteria that have guided our investment strategy for many years and will continue to guide us in the coming weeks.

 

 

 

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