Recessions, Bubbles & Crashes: What You Need To Know

This Post is Brought to Your By Our Partner, Wall Street Survivor. See the original post here. The question on everyone’s mind: are we in a bubble?

Ever since the S&P 500 fell from its all-time high (around 2,100) investors have been getting super antsy about where the market is headed. Are we in a bubble? Will the market crash? If so, will we once again see a recession like the infamous one in 2008?

Uhh. Can we get some perspective, here?

Bull Markets

As of this writing, the current bull market (a market in which prices are rising) is around 6.5 years old. Almost 3 years older than the average bull market, if you consider every single one since 1932.

What if we go back even further?

If you look at every bull market since 1871, (yep, there are records from back then) the median bull market has lasted 50 months (just over 4 years). This one is in its 79th month (measured from March 2009). This means it’s more than 50% longer than the median bull market. In case you didn’t get that: this current stock market run-up is 50% longer than half of all the bull markets in the last 144 years.

The median bull market has also delivered 124% in stock market gains in that time. In comparison, the last 6 and a half years has seen the market gain nearly 200%. It’s easy to see that the market is pretty ripe…but while it may be pretty long in the tooth, bull markets don’t die of old age alone.

recession bubble

When you compare this “bubble” to other long-lived bulls, however, you’ll see that it could actually have much further to run. While currently sitting pretty in 5th place, the next longest bull market ended in 1929 (ominous…) – lasting 98 months – so this one would have to continue climbing up for another 20 months to usurp it.

Bull markets tend to come crashing down for a reason. In 2008, there was the sub-prime lending crisis. In 2001, there was the dot-com bubble burst – sending many newly minted internet companies to an early grave. Sites like pets.com completely folded while better known names like Amazon saw their share prices collapse.

So, what can an investor expect from a bubble bursting? What does the typical bear market (a market where prices are falling) look like? Is it just complete mayhem, with stocks dropping to zero and people flinging themselves out of high-rise buildings?

*If we’ve already lost you, we’d highly recommend checking out this in-depth course on recessions, bubbles and crashes.

Bear Markets

Well, of all the bear markets since 1871, the median bear market lasted about 24 months (a full 2 years) and took about 38% of the stock market’s previous gains. Note that a bear market, on average, is shorter than a bull. What makes that number scarier is that, because of the way compounding works, a 100% gain is entirely wiped out by a 50% loss and a 50% loss needs a 100% gain to get you back level.

Just like with bull markets, there are many different types of bear markets. They can be short and intense, like the one in 1962 that lasted just 7 months and wiped out nearly a quarter of the previous market’s gains or long and slow – like the one which ran from 1910 to 1921.

recession bubble

So…if you put it all together, you end up with a market that is currently quite mature. We know that a bear market could undermine all the good work that’s been done in the last 79 months, and it could do so very quickly.

The market is very delicately balanced.

You have to ask yourself: can you see this market growing for another two years and beating the record set by the 1929 bull?

On balance, we’d have to say…no. There’s just so much working against it.

Oil prices are a huge drag on the energy sector right now, a sector which is nearly 20% of the overall U.S. market.

China, one of America’s key trade partners, is experiencing difficulty – which makes it harder to argue for strong, continued growth. If China imports 10% of all U.S. exports…what does that mean for U.S. companies when China starts to say “no thx”?

recession bubble

Add in the troubles in Europe and Japan, and the global economic outlook seems very dismal indeed.

The question then becomes: where will the growth come from?

If there’s any to be found, it’ll probably come from where it’s been coming from since 2009: the Federal Reserve.

The FED has been backing the stock market for a while now, by leaving interest ratesnear zero, essentially making bonds less attractive to investors and pushing the marginal investor into stocks instead. That causes the stock to artificially rise.

The FED is sitting on the sidelines watching all this, but have so far been reluctant to raise interest rates, because they’re super scared of what might happen to the stock market.

The one reason, in our humble opinion, that we may not end up seeing this bull market end in a catastrophic crash is that people seem to be cautious. The events over the last year seem to reflect that. Year-to-date, the stock market has been flat. People are just content to see what happens. There’s a famous quote that states, “bull markets mature amid optimism and die in euphoria”, and so far there’s a little optimism but not much euphoria.

Really, the most hubris is coming from the tech world, where valuations of startups like Uber and AirBnB are reaching crazy proportions. But considering that these are all private companies, their fortunes don’t have too much bearing on the stock market.

The most prudent thing to do is to prepare for the worst. At a point where it just doesn`t seem like things are going to look up, one should take precautions to protect their principal/initial investment.

Good luck!

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