Fewer Recessions, But Bigger Changes
Data from around 150 years of the US market shows an interesting change in the way recessions happen. In the early 1900s, the US economy saw around five to six recessions every 20 years. These recessions often lasted for one and a half to two years. During the same period, there could be three to six bear markets, with the market falling around 30% to 40%.
But as the years moved toward the 1970s, 1980s and 1990s, the number of recessions slowly came down. The average number of recessions in every 20-year period kept falling.
Governments Step In Faster
After the 2008 financial crisis, this natural economic cycle seems to have changed even more. Whenever signs of a recession start to appear, governments and central banks often step in with stimulus. They may inject money into the economy, increase liquidity or provide support to businesses and people. This can help stop a major economic fall. But it can also delay the normal process through which weak parts of the economy are removed. Instead of allowing the problem to fully play out, the problem may simply be pushed away for some time.
Shorter Recessions, Fast Market Moves
This change can also be seen in the length of recessions. Earlier, a normal recession could last around one and a half to two years. Now, the average duration has become much shorter, and in the last 10 years there was even a recession that lasted only around two months. Markets are also moving faster. Corrections can come quickly, but the overall fall in a bear market has not changed as much. Earlier, bear markets could see a 35% to 40% fall, and large market declines can still reach a similar range today.
Is the Natural Market Cycle Changing?
The bigger question is whether the natural market cycle is being disturbed. When governments and central banks are very quick to stop markets from falling, companies that may normally fail during a recession can continue to survive with support or debt. This can make it harder for new companies and new industries to take their place. A healthy economy needs change. Weak businesses need to leave, while new businesses and industries need space to grow. If old problems are continuously supported, this natural change may take longer.
Old Valuation Rules May Not Be Enough
This also creates a problem for investors who depend only on absolute valuations. In the past, investors could look at a company’s valuation and decide whether it looked cheap or expensive. There was also a time when good companies could be found at price-to-earnings ratios of 10 or 12. Today, many assets remain expensive for long periods. This is not limited to stocks. Real estate and other asset classes can also stay at high prices. Because of this, old valuation rules may not always give the full picture.
Think in Relative Terms
In today’s market, investors may need to compare investments with each other instead of looking at one valuation number alone. A company may look expensive on its own, but it could still look better than another company in the same market. The same idea can be used when comparing stocks, different markets and different asset classes. The key is to understand where an investment stands compared with the available choices. As the market structure changes, looking at relative value may become more useful than simply asking whether something is absolutely cheap or expensive.
