I attended a conference down on the Mornington Peninsula last week. It's such a beautiful place down that way. In less than one hour, you're in a different world. One where the ocean breeze gently touches your skin. One where the air is fresh and crisp high up in the mountains. Food just tastes better. My mind stops racing. And I feel myself more present in the moment. It's also a place where economists and financial experts gather to ignite a financial frenzy. The perpetual search for the next recession or crash — and the longing for a return to pre-COVID prices, office life, or trade — risk blinding us to the economic realities of the present.
Part of my job involves staying up on the wild swings in opinion, never ending hot takes, and the endless speculation and debate over what's next for the economy.
Over the last 18 months, central banks around the world had to shift gears to fight inflation using interest rates as their lever. Recession was inevitable. So far, the predictions have been wrong. With US unemployment below 4%, GDP rising at almost 5% last quarter, and with inflation falling slowly but steadily, hardly anyone seems to appreciate this.
The fact, and the reality is that the economy is doing just fine. Is it perfect? No. The only recession that exists is the one in your imagination. Am I saying we won't have an economy recession? No. Is the economy perfect? No. I am not saying that at all. What I am saying is that what you want or expect to happen, and what actually happens could be two very different things.
Take house prices for example - indeed the debate is such fodder. I plotted Australian residential property prices from 1980 and shaded the periods where we saw a (US) recession.
Take a guess as to how the residential property market performed during these recessions? Don't worry, I've crunched the numbers for you, take a look below:
Recession | Property Market Performance | Peak to Trough (Property) Decline in and Around Recession Period |
January 1980 – July 1980 | +9.48% | NA |
July 1981 – November 1982 | +1.34% | -8.53% |
July 1990 – March 1991 | -2.11% | -2.11% |
March 2001 – November 2001 | +13.87% | NA |
December 2007 – June 2009 | -1.96% | -6.87% |
February 2020 – April 2020 | +0.44% | -1.17% |
Average | +3.51% | -4.67% |
Interesting, isn't it? During the actual recessionary periods, the market was up on 4 out of 6 times, or 67% with an average +3.51%. However, in and around the recessionary period it was down 4 out of 6 times, or 67%, with an average decline of -4.67%. Remember, these are national numbers.
In the short-term so many things can unfold, for better or for worse. Over the long-run though, I'm still bullish on the market. I believe we have a long runway ahead of us. This is a chart I put together some time ago and have been updating it regularly. It plots the performance of the (US) stock market during and following the Spanish Flu, the Asian Flu, and COVID-19. The red spike on the far-right hand side is the tail end boom and subsequent great depression (just in case you were curious).
Will this current boom last forever? Of course not. Just take a look at the above chart. The rollercoaster ride is part of the process. Investors need to be able to digest the ups and the downs in order to participate in the long-term benefits of investing. For now, the market is doing just fine. Let us not mistake what we think should be happening with what is actually happening right now.