Length of Market Crashes
In our prior post, we discussed the History of Market Crashes (link). In this post, we will discuss the Length of Market Crashes.
The National Bureau of Economic Research (NBER) documents the US Business Cycle Expansions and Contractions since 1854. Contractions (recessions) start at the peak of a business cycle and end at the trough.
We can use Investopedia to help us flesh out definitions. (link)
A recession is a macroeconomic term that refers to a significant decline in general economic activity in a designated region. It had been typically recognized as two consecutive quarters of economic decline, as reflected by GDP in conjunction with monthly indicators such as a rise in unemployment. However, the National Bureau of Economic Research (NBER), which officially declares recessions, says the two consecutive quarters of decline in real GDP are not how it is defined anymore. The NBER defines a recession as a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.
Recession is a normal, albeit unpleasant, part of the business cycle. Recessions are characterized by a rash of business failures and often bank failures, slow or negative growth in production, and elevated unemployment. The economic pain caused by recessions, though temporary, can have major effects that alter an economy. This can occur due to structural shifts in the economy as vulnerable or obsolete firms, industries, or technologies fail and are swept away; dramatic policy responses by government and monetary authorities, which can literally rewrite the rules for businesses; or social and political upheaval resulting from widespread unemployment and economic distress.
Economists say there have been 33 recessions in the United States since 1854 through to now in total. Since 1980, there have been four such periods of negative economic growth that were considered recessions. Well known examples of recessions include the global recession in the wake of the 2008 financial crisis and the Great Depression of the 1930s.
A depression is a deep and long-lasting recession. While no specific criteria exist to declare a depression, unique features of the Great Depression included a GDP decline in excess of 10% and an unemployment rate that briefly touched 25%. Simply, a depression is a severe decline that lasts for many years.
Back to the NBER data (link), we can get some historical data:
|Peak month (Peak Quarter)||Trough month (Trough Quarter)||Contraction||Expansion||Cycle|
|Duration, peak to trough||Duration, trough to peak||Duration, trough to trough||Duration, peak to peak|
|1854-2020 (34 cycles)||17.5||41.4||56.2||59.2|
|1854-1919 (16 cycles)||21.6||26.6||48.2||48.9|
|1919-1945 (6 cycles)||18.2||35.0||53.2||53.0|
|1945-2020 (12 cycles)||11.1||64.2||69.5||75.0|
Simplistically, the length of market corrections/contractions typically lasts 11 months (since 1945). Obviously, this averages individual events so there are always outliers.
My key takeaway from this is that it typically takes months to go from all-time highs (ATH) to market bottoms. Frankly, I can’t explain the COVID 2020 crash that occurred in the span of a few weeks but I am just providing historical data. Perhaps because everything closed up all at once, we saw a more pronounced reaction but that is my theory.
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