2001 Recession

As for the recession of 2001, it is one of only two economic contractions that this country has experienced in the past quarter century. And, like the recession of 1973-1975, it had the distinction of being precipitated by unusual imbalances for which the economy was unprepared. By the end of 2000, the economy had become overly invested in internet and other technology companies with unsustainable or otherwise faulty business models. These excessive valuations created a bubble that, like all other bubbles, ultimately burst, leading to a near halving of the S&P 500’s value.

The 2001 market downturn was again a product of an imbalance, this time in the form of a financial bubble. Yet other shocks worsened the situation even further. The terrorist attacks of September 11, 2001, a warning by Alan Greenspan that the Federal Reserve would begin aggressively raising interest rates and the announcement of a recession in Japan all exacerbated the ultimate selloff.

Again, in the National Bureau of Economic Research view, the 2001 recession was relatively brief and benign. In fact, the bureau considers the 2001 recession to be one of the shortest in history. But the structural imbalances and external shocks aggravated the associated bear market and turned it into one of the worst ever.

2008-2009 Recession

Then there is the financial crisis—or Great Recession—of 2008-2009, which, by many metrics, was the worst recession the U.S. economy has experienced since the Great Depression. While much has been written about its complex causes, the 2008 downturn was preceded by a housing market bubble, which burst at the end of that year and had been inflated in part by the proliferation of financial derivatives. These conditions were inflamed by the failure of several large financial institutions and the exposure of massive financial frauds.

The Great Recession lasted for 18 months, and the attendant bear market prompted a 56% loss in stock market value.

Today

So what does all of this information tell us about the next recession—whenever it may occur? Quite a bit, actually.

First, just because the latest expansion has been so long doesn’t mean by fact, principle or logic that the next recession must be severe. Historical patterns do not support this fear, and in fact it’s reasonable to expect longer expansions and shorter contractions. Again, the long current expansion is probably more about the last recession than the next one.