Interest Rates, Inflation and Bear Markets, Oh My!
Inflation, interest rate hikes, declining markets, bear markets, recession. After years of low interest rates and minimal inflation, hearing these terms in the news may cause some fear and uncertainty. But after the last few years, we should be pros at dealing with uncertainty, right?
Any time there is a shift in the economy, there are things we feel in our everyday lives (inflation) and things that have a short-term impact on our investments (market volatility). But what does this all mean in the long run? We can look over previous time periods that experienced recessions to see what inflation looked like and the market activity to help give us some perspective.
1929-1933 – The Great Depression: One of the largest recessions in the past century, the Great Depression lasted for 43 months. During that time period markets declined 83.6% from the previous peak over 33 months and inflation was -26.6% (actually deflation).
1945 – World War II Recession: This recession only lasted 8 months. Markets had a short one month decline of 3.9% while inflation stood at 1.7% during that time period.
1957-1958 – This 8-month recession was short but mighty after the 1950s boom. Markets declined by 14.9% over 5 months, and inflation was at 1.8%.
1973-1975 – Oil Crisis: This 16-month recession experienced double-digit inflation of 14.4%. Markets began declining prior to the recession starting, declining 46.4% over 21 months.
1981-1982 – Prior to this 16-month recession we saw historically high interest rates. The market decline lasted for 14 months, declining 15.9%, and inflation was at 7.2%.
1990 – Gulf War: During this 8-month recession inflation was 3.4% and markets declined 17% over 5 months.
2001 – Tech Boom and Bust: This market decline lasted for 13 months declining 33.2%, while the recession only lasted 8-months. During this period inflation was very low at 0.9%.
2007-2009 – Global Financial Crisis: One of the longer recessions lasting 18 months, we saw markets declining 50.4% over 16-months with inflation of 1.8%.
2020 – COVID-19: This short jolt of a decline lasted 2 months, even though we still feel some of the ramifications of it. Markets declined 20.2% during a 2-month period and inflation for those 2 months was -0.2%.
Each decline or recession shows a unique snapshot of our economy. We see inflation, deflation, long market declines, and short market declines. Sometimes it’s triggered by a war, policy changes, or a virus. Zooming out from each snapshot gives us long-term perspective. We can see at some point after a market decline and recession there was a recovery and a new high point in the market.
This is not the first time we have experienced these economic shifts in our lifetime, and it won’t be the last. These economic cycles are just that, cycles. While each cycle has different triggering events, when it comes to markets, we expect the ups and downs to happen. We just never know when we will experience them.
Regardless of what economic changes we experience, we can see that historically markets have rewarded disciplined investors. Our philosophy will remain the same, having a diversified portfolio that is systematically rebalanced when stocks or bonds veer from your intended targets, and focused on the long-term trend.
Whitney Kelley, CFP®
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