Double Dip Recession Redux

Double Dip Recession Redux

The phrase “double-dip recession” is one I am hearing a lot recently given the economic data coming out detailing the impact of COVID on 2Q 2020. To me, this rings similar to the double-dip recession calls from 2011.

For curiosity sake, I rang up the Google machine to go back in time nine years and came across the article below from the International Business Times:

Global Recession 2011: It’s Real, and It’s Going to Hurt

Within this article are a few quotes that I’d like to draw your attention to, if for no other reason than to cite how smart pessimism can sound, even when it turns out to be terrible information to act on for the main street investor. Below are a few quotes with a little commentary from yours truly.

Let’s face the mounting facts and just say it in plain English: The world is slipping into Global Recession 2011, and governments don’t have the gunpowder to ward it off.

The U.S. economy is barely growing at all. Companies aren’t hiring. The federal budget deficit is above $14.5 trillion. Companies are stockpiling cash because, as Ford CEO Alan Mulally said in a press conference this week, because the consumer has pulled back.

It’s worth noting that this article came out about a month after the S&P downgraded U.S. debt and the market was in a tailspin.

It’s been two years since the official end to the Great Recession, the worst financial collapse since the 1930s, and despite billions in global government spending and efforts to stave off a double-dip recession, it now appears that those efforts have failed. Just because a new recession hasn’t been officially declared doesn’t mean we’re not at the threshold.

What’s scary to many economists about the Global Recession 2011 is that governments are both less equipped and less interested in dealing with financial crisis this go-round. Most are spent from prop-up efforts that began in late 2007 and 2008 during the Great Recession, which has lingered in needs and impact ever since.

Apparently, it gets worse.

For instance, the U.S., the world’s largest economy, is saddled with debt and political turmoil — illustrated by a credit rating downgrade last month by Standard & Poors by one notch from AAA amid deep political divide during the debt-ceiling debate in Congress.

So far, however, the U.S. Federal Reserve has taken the strongest action in the fragile economy, announcing this week a historic — if not highly unorthodox, according to MSNBC — program of reshuffling $400 billion of its bond holdings to try to push interest rates lower than they already are (which seems nearly impossible, considering they are close to zero).

[Author note: Federal Funds Rate in Sept 2011 was 0.08% which is the same today. However, the 10-year Treasury yielded 1.84% on Sept 23, 2011, which today stands at 0.55% so rates have fallen 70% since this time.]

But the Fed’s aggressive action was seen by many as more of a few crackers thrown out to feed a starving society. If anything, it spooked global markets rather than calmed them as with the action, the Fed revealed its deep concern about conditions while also showing there’s little more it can do beyond a try-anything approach to make a small dent in a big problem.

What I love about reviewing crashes from the past is that it helps us remember the context of a decline, but without the emotional cues that so often accompany the times. I can assure you that this was a scary time just as all market sell-offs are scary.

The day this article ran, the S&P closed at 1,136. By the end of that year, the market would close at 1,257 or 10.5% higher. Additionally, the market only closed below 1,136 on three days during the remainder of 2011. Thinking of it in an even more interesting way, other than the three days that offered investors an opportunity to invest at prices below 1,136, those lows have not been seen since as the S&P currently stands at 3,306 despite the 36% decline we so recently experienced.

So, I guess we can safely say that the double-dip recession never fully materialized.

It’s so easy to look back and say we should have known better. But the truth is that during these market sell-offs, it always seems like the world is coming to an end. It seems that way because it’s during these times that “smart people” come out of the woodwork to tell you all the reasons this is going to or could get worse. Sell-offs are always scary. It’s the way these things work.

Back to 2020 for a moment. Is it possible that the COVID crash, where the market closed at 2,237 on March 23rd, will be the last time we will ever see those prices again? Remember how scary it was to be a buyer or a holder of equities at that moment? I don’t know if we’ll see those levels again, but the higher the market goes, the less likely that scenario becomes.

But old news is just that, old news. One day – regardless of how many years it takes – we will be reading about the decline(s) of 2020 as a distant memory and will likely be asking ourselves why we didn’t put more money to work when we had the chance.

It is only through the lens of history that we can look at these types of events with clear eyes because we know how the story ends.

In the short-term, all investing a gamble which is why I don’t believe anyone should invest money in the stock market that they may need in the near term. But human ingenuity and progress have a way of making pessimism look silly over the long-run.

Stay the Course,
Ashby


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