Recessions are significant economic downturns characterised by declining economic activity, typically from falling gross domestic product (GDP), real income, rising unemployment, and shrinking consumer and business spending. In today’s uncertain economic environment, understanding recessions is essential for investors to safeguard their portfolios and capitalise on potential opportunities.
A recession is commonly defined as two consecutive quarters of negative real GDP growth. Beyond technical definitions, recessions represent periods of widespread economic hardship affecting businesses, consumers, and markets, so no one is left out of the equation. The National Bureau of Economic Research (NBER) evaluates recessions based on three factors: depth, diffusion, and duration.
Great Depression (1929-1939)
The Great Depression began with the stock market crash of October 1929, which was fuelled by speculative investing and extensive use of leverage. Banks quickly faced insolvency as customers panicked and withdrew their savings, leading to widespread bank failures. The Great Depression was also partly triggered by protectionist policies like the Smoot-Hawley Tariff Act, and the gold standard had essentially spread the crisis globally. The U.S. economy rapidly contracted, resulting in a prolonged deflationary spiral.
- Real GDP declined: 29% (1929 to 1933)
- Peak unemployment: 25% (1933)
- Bank failures: 7,000 banks collapsed (1930 to 1933)
This recession devasted investor confidence and severely affected markets worldwide. It is also one of the most prolonged recessions in modern U.S. history. Recovery involved massive government interventions, inducing Franklin Roosevelt’s New Deal policies (economic relief and reforms), which slowly rebuilt economic confidence and stability over several years. Some said World War II ended the Great Depression as the economy shifted to a war economy when the U.S. went to war with Japan after being attacked and only brought the unemployment rate down below 10% after a decade.
1973 Oil Crisis Recession (1973-1975)
The oil crisis was triggered by geopolitical conflicts (Yom Kippur War), resulting in the Organization of the Petroleum Exporting Countries (OPEC) imposing an oil embargo. This embargo caused oil prices to quadruple rapidly from around $2.90 to $11.65 per barrel by January 1974. The U.S. economy relied heavily on oil and had experienced significant disruptions, leading to stagflation (high inflation and stagnant economic growth).
- Real GDP declined: 3.1% (3Q1973 to 1Q1975)
- Peak unemployment: 9% (May 1975)
- Inflation: Rose from 2.71% (June 1972) to 12.34% (Dec 1974)
Stock markets were hit. From January 1973 to December 1974, the S&P 500 plunged 48% as high inflation eroded people’s purchasing power. The high-interest-rate environment (the Federal Fund Rate reached 12.92% in 1974) also suppressed economic activity. Recovery was gradual and required major structural economic adjustments, including diversified energy policies.
Dot-com Bubble (2000-2002)
The Dot-com Bubble was driven by speculative investments in rapidly growing internet companies during the late 1990s and an abundance of venture capital. When expectations failed to materialise, many companies with skyrocketed stock prices had unsustainable business models and revenue-generating capabilities. Investors abruptly sold off technology stocks, causing the bubble to burst. The economy slowed down as capital investments dried up.
- Real GDP declined: Negligible
- Peak unemployment: 6% (2002)
- Stock market crash: NASDAQ fell 76.8% (2000 to 2002)
The market downturn was sharp, especially in technology sectors, causing significant losses for investors. The recovery was sector-specific also; traditional sectors rebounded quicker, while technology took several years to recover fully. The NASDAQ took nearly 15 years to regain its 2000 peak, finally reaching it in 2015.
Global Financial Crisis (2007-2009)
The Global Financial Crisis, also known as the subprime mortgage crisis, was triggered by the bursting of the U.S. housing bubble, compounded by excessive financial leverage and complex derivatives. Financial institutions collapsed because of risky derivatives like collateralised debt obligations (CDO). As banks faced insolvency, credit markets froze, and economic turmoil spread rapidly globally.
- Real GDP decline: 3.8% (4Q2007 to 2Q2009)
- Peak unemployment: 10% (2009)
- Housing price decline: ~30% nationwide
Market impacts included sharp declines in asset prices and investor panic. Governments worldwide implemented aggressive monetary policies, bailouts, and fiscal stimuli. In the U.S., government initiatives such as the Troubled Asset Relief Program (TARP), which involved purchasing troubled companies’ assets and stock, and quantitative easing (QE) were introduced. GDP returned to pre-crisis levels in 4Q2010, but the unemployment rate only returned to below 5% in 2016.
COVID-19 Pandemic (2020)
The COVID-19 recession is the most recent and uniquely caused by a global health crisis. Lockdowns aimed at controlling the spread of the virus abruptly halted economic activities worldwide, disrupting the supply chain. The consumer and travel industries were also affected severely.
- Real GDP declined: 9.2% (4Q2019 to 2Q2020)
- Peak unemployment: 14.8% (2020)
- Stock market crash: the Dow lost 37%, S&P 500 plunged by 34% (Feb to Mar 2020)
This recession was marked by an unprecedentedly swift market decline, followed by rapid government intervention and extensive stimulus programs. These measures led to a swift market rebound, one of the fastest on record. In most economies, GDP recovered within a year.
The fifth perspective
From all the case studies, it’s evident that recessions typically trigger significant volatility in stock markets, often marked by sharp sell-offs and heightened investor anxiety. However, they also offer valuable buying opportunities for long-term investors who can navigate downturns strategically. History shows that after each recession, the stock market eventually recovers to its previous highs, though the timing of the recovery may vary.
Recessions are cyclical and inevitable elements of economic activity. By understanding historical patterns and learning from past downturns, investors can respond with greater strategy and composure, fostering preparedness and confidence during periods of economic uncertainty.
