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Double Dip? We're Already in Recession

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Even though the market never exactly repeats itself, a comparison of data points to ones in the past seems to point to a turbulent road ahead.

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Often when we ask poignant questions, we don't get the answers we're seeking. Instead, we get more questions. However, it's in the asking of these questions that we often find insight. Consider the question, "Is the economy recovering?" It seems that it is. After all, the US Commerce department reports that we had 2.7% GDP growth last quarter and 5.6% in the last quarter of 2009. By definition, when we have two straight quarters of GDP growth, we're supposed to technically be out of a recession. Then, why is it that we continue to ask, "Are we out of the woods yet?" Inevitably, that's a much more important question investors should be asking.

Even though past performance isn't necessarily indicative of future results, it's often the only basis we have to support our assumptions. So, even though the market never exactly repeats itself, the data points we see today can easily be compared to ones in the past and seem to point to a turbulent road ahead.


Past performance isn't necessarily indicative of future results.

The chart chosen compares the Dow Jones Industrial Average from 1937 to 1939 to the SPDR S&P 500 from 2008 to 2010 during the same monthly time period. These two specific indexes were selected because they allow for a graphic comparison without the need for re-scaling (which would require two separate graphs and wouldn't be as dramatic).

If you examine the chart above, you'll see that bear markets are accentuated by the red lines and bull markets are accentuated by the green lines. The chart pattern we see when comparing the two time periods to each other is ominously similar, and the data points to another major decline in the stock market. It's important to note that the rallies are seen by many analysts as liquidity rallies rather than market rallies, and are based more on a reaction to government stimulus than investor sentiment because during both time periods, there was massive government-spending to promote growth. Because the stock market is considered to be a leading indicator, strong rallies tend to give the impression that the economy will soon improve. The health of the stock market can appear to be propped up through stimulus, which gives the "lagging" economy time to catch up and recover. However, if the economy cannot catch up soon enough and the stock market hits too much resistance, it can dip again.

If one looks back at the market during the late 1930s, the market rallied in 1939 and eventually ended up bottoming out in 1942 before it fully recovered in 1945. There's a strong parallel exhibited when viewing these two time periods and, if history comes close to repeating itself, we may be set for another 5-to-7-year grind before we achieve complete recovery.

Much like the post-depression stock market of the late 1930s, the global economic crisis of 2008 has left the world with an astronomical amount of debt. The global intervention of choice has been continued stimulus over austerity measures. From the TARP to the Greek bailout, we're surrounded by the Keynesian economic solution of adding additional debt to solve the problem of existing debt. The Keynesian theory is that if institutions, banks, or governments get more money, they'll take that money and use it to expand and grow. The theory may work on a small or isolated level, but it faces a tremendous amount of pressure if used on a global scale.

When an isolated economy has a debt issue, they can stimulate growth by selling bonds and incurring debt. They can then use that cash flow in order to invest in their labor force and their infrastructure in order to fuel growth. At some point, their growth (GDP) will outpace their debt and they'll get back to profitability. A great example of this theory working can be seen by examining Turkey. In the late 1990s, their debt-to-GDP ratio was approximately 80%. They weren't solvent enough as an economy to become part of the EU and they didn't become part of the euro-currency nations. However, over the past decade they were able to lower their debt-to-GDP ratio to less than 40% as they clawed their way back to having a sustainable economy.

Why was Turkey able to do what Greece couldn't (even though Turkey is now again facing pressure that's spilling over from European debt woes)? Their currency became so devalued against the euro that that their export business began to thrive. Not being part of the EU actually stoked their economic fire because it made it cheap for the other euro-nations to trade with Turkey. The pressing issue now facing Europe is that they have one currency and 16 fiscal policies. A strong euro is good for Germany and France, but it's bad for Greece and Spain. So, Europe will most likely continue to struggle with debt issues because it's almost impossible to account for the divergent needs of different eurozone countries.
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No positions in stocks mentioned.

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