1990 All Over Again?

In the aftermath of the crisis in the credit markets, many economists have said that the US economy is facing the worst recession in the post WWII area. While the ultimate outcome of the current period is anyone's guess (many are now doubting we will even end up with a recession), we wondered whether investors and economists tend to think every recession (or even period of economic weakness) is the worst ever as they are going through it, and then once it's over say, "Oh that wasn't so bad after all."

For example, the 1990 recession is considered by most to have been pretty mild. But at the time, people thought it was a lot worse. For example, in February 1992 - almost a year after the recession ended - US News and World Report said that, "The current downturn is different. Many cash-strapped homeowners whose houses have fallen in value won't be able to take advantage of the refinancing bonanza promised by the Fed's rate cut. So far, unemployment remains lower than it was a decade ago, but this recession isn't over yet, and the economy's glaring structural problems will stifle growth and new jobs." US News went on to say that the recession would be "unlike any the country has experienced in the post-World War II era, the result of years of profligacy and irresponsible government policies." Sound familiar? For those interested, we highly recommend reading the entire article to see just how negative sentiment was leading up to one of the greatest decades of growth in American history.

In fact, if we were to compare the 1990 period to today, there are many similarities. As just an example, in each period, the dollar was weak, inflation was on the high side, oil spiked, and credit markets were under stress. In both periods there was even a George Bush in the White House! With these similarities, it comes as little surprise that the performance of the stock market has been similar during both periods. In the chart below, we overlaid the S&P 500 in the current period (since October 2007) with the period from June 1990 through June 1991. As the patterns show, for the last six months, the two periods have tracked each other closely. While this is not meant to imply that the S&P 500 is poised for a monster rally, the correlation between both periods is certainly worth noting.