The economy has halted for the past several weeks, and with it the longest economic expansion ever has ended, meaning we are now in a recession. What makes this recession unique is the government intentionally brought it on, with the chances for an economic bounce back later this year high if the virus is contained. If this recession becomes one of the shortest on record, as we expect, stocks may enjoy better times ahead, as stocks historically have led the economy out of recessions.

Longest Expansion Ends
After more than 10 years of a record expansion, the US economy likely entered recession at the end of March. The war against the COVID-19 pandemic has put a halt to our economy, as millions of workers have had to stop working or lost their jobs. This time two months ago, the economy was actually showing signs of improving, but that is on hold for now.

Although the Nation Bureau of Economic Research (NBER) hasn’t officially declared March 2020 the start of a recession, we think it is a safe assumption they will eventually. This economic expansion lasted a record 128 months, more than double the average expansion length, and topped the previous record from the 1990s [Figure 1]. Although this was the longest expansion ever in terms of gross domestic product (GDP) growth, it was fairly average, gaining exactly 50% in nominal GDP.

Could There Be A Depression?
Some economists are predicting GDP could be down more than 30% on an annualized basis in the second quarter of 2020, which has led investors to ask if the economy could slip into a depression. Four major policy mistakes occurred after the 1929 stock market crash that together helped extend the Great Depression, including an unemployment rate still at 15% nine years after the market crash.

1. Monetary policy mistake. The Federal Reserve (Fed) actually tightened policy in an attempt to stem gold outflows.
2. Fiscal policy mistake. The government increased taxes on individuals and corporations to help balance the budget. Government spending was cut nearly 25%.
3. Regulatory mistake. Many unnecessary regulations were put in place that did little to help businesses grow or instill confidence.
4. Trade war. There was a global trade war, which caused tariffs to soar and hurt the global economy.

We aren’t seeing these same mistakes now: The Fed is easing its policy, the government is providing massive fiscal stimulus, regulations are actually being relaxed to help banks free up capital, and trade restrictions are being lightened.

Not Your Average Recession
We’ve said before there are several ways to stop your car. You can pump the brakes gradually, slam on the brakes hard, or hit a tree. Our economy hit a tree. One thing that makes this recession so unique is it was intentionally brought on by the government by closing non-essential businesses and issuing stay-at-home policies. The near-term pain of shutting down the country for a few months has been necessary; the alternative was to take a less drastic approach and potentially risk prolonging the drag on the economy.

Since WWII, the average recession has lasted 11 months [Figure 1]. Depending on how long it takes to contain the virus, we wouldn’t be surprised if this becomes one of the quickest recessions ever. Considering the massive fiscal and monetary policy that has been put in place, with more likely on the way, there are plenty of reasons to think economic growth may be stronger later this year.

The most comparable economic scenario was the early 1980s when the Fed intentionally hiked rates dramatically to stop runaway inflation. In order to put an end to the backbreaking inflation, former Fed Chairman Paul Volcker hiked interest rates to a peak of 20% in June 1981. Inflation went from nearly 15% in early 1980 to less than 3% by 1983. There were consequences, however, as the restrictive monetary policy sent the economy into a recession, and unemployment spiked to 10%. Of course, ending inflation helped pave the way for massive growth in the 1980s and 1990s—it just took some near-term pain to get there.

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