Swing Trading Strategies & Stock Picks Since 2003

Business Cycle Expansions and Contractions.

Most business watchers are familiar with the recent news that the National Bureau of Economic Research (NBER) recently declared that we are officially in a recession and it started a full year ago in December 2007. The report from the NBER linked above give the dates of the U.S. economic expansions and contractions going back to 1854.

I took a look at the recession since WWII, since the modern industrial economy has more in common with the post-war era than the more agricultural emphasis before the war. Since WWII there have been 10 recessions not counting this one. The average length was 10.4 months with the shortest coming in at 6 months and the longest at 16 (twice). At 12 months of age, the current contraction is of above average length and has the distinct possibility of becoming a new post war record.

I would like to comment a bit about the two 16 month recessions, since I remember each fairly well. The 1973 to 1975 recession was caused by oil prices skyrocketing when the Saudis (primarily) realized they could get a lot more money from the West if they put on a little pressure. That pressure was an oil embargo that resulted in gasoline shortages, rationing and lines at gas stations. I remember a family trip from Minnesota to California in the family’s Plymouth Fury III and we could only get 6 gallons of gas at many of the gas stations along the interstate. We saw America as a gas station every 60 miles!

The 1981-1982 recession was due to high interest rates when Paul Volker pushed short term rates into the high teen after President Jimmy Carter was unable to Whip Inflation Now with his buttons. The recovery started when President Reagan cut the top marginal income tax rate from 70% to 50% to 28%.

The early 70’s recession saw unemployment peak at 9% two months after the recession officially ended. The longer 80’s recession saw unemployment climb to 10.8% but did not reach this level until a full year after the recession ended. It appears unemployment data can tell us little about the future of the economy as a whole.

The stock market averages tell another story, however. The Dow Jones Industrial Average reached a low close of 577.60 on December 6, 1974, 11 months before the end of the in-progress recession. In 1982 the DJIA hit a low of 776.92 on August 12, 1982, signaling the impending end of the recession when the economy bottomed officially in November of that year.

So if recent history can be a guide, the unemployment rate is still months from peaking and has little effect on the resumption of economic growth. If the market did reach its current bear market bottom a couple of weeks ago, the end of the recession is 5 to 11 months away. As investors, we do not care about the official end of the recession, just whether the market is signalling it. That will be the start of a new bull market.