TOL - 22nd Dec, 2022
Lessons from past US recessions
In the context of the bond market signalling a US recession in late 2023/early 2024 - where CCI has been forecasting a recession since earlier this year - we have looked at the key lessons from modern US recessions, keeping in mind that no two downturns are the same and highlighting that current high US inflation is unusual in that it reflects both COVID-related supply factors and strong demand.
The main points from past recessions are that:
- High-inflation recessions usually last almost a year, which is a little longer than the typical low-inflation recession;
- Unemployment is the best single measure of the start and end of a recession. Unemployment rises sharply during a recession, where the usual increase is similar for both low- and high-inflation recessions. The fact that the rise in unemployment is not larger during high-inflation recessions may seem surprising, but partly reflects the Federal Reserve’s “stop-go” policy mistakes that led to multiple recessions before the high inflation of the 1970s was brought under control. More spare capacity is created relative to the NAIRU during high-inflation recessions;
- Core inflation falls by more during high-inflation recessions, usually reaching a trough about three years after the start of US recession;
- The Federal Reserve usually starts cutting interest rates before the sustained increase in unemployment that heralds the start of a recession, although the pattern is less clear when inflation is high, where the peak in the policy rate is usually short and very sharp;
- 10-year government bond yields typically peak near the start of high-inflation recessions; and
- Stock prices fall sharply during recessions, more so when inflation is high. The trough in stock prices is typically half a year after the economy has entered a high-inflation recession.
Note: The following charts rely on the National Bureau of Economic Research chronology of business cycles, where a recession “involves a significant decline in economic activity that is spread across the economy and lasts more than a few months” based on household income, employment, spending, and industrial production. Also, the starting peaks and troughs in the charts are usually the peak or trough closest to the start of a recession.
Never miss an insight
Enjoy this wire? Hit the ‘like’ button to let us know. Stay up to date with content like this by hitting the ‘follow’ button below and you’ll be notified every time we post a wire.
Not already a Livewire member? Sign up today to get free access to investment ideas and strategies from Australia’s leading investors.
Never miss an update
Enjoy this wire? Hit the ‘like’ button to let us know.
Stay up to date with my current content by
following me below and you’ll be notified every time I post a wire
Based in Sydney, Kieran Davies is Chief Macro Strategist at Coolabah Capital Investments, an asset manager with 40 executives and over $8 billion in fixed-income strategies. Kieran is responsible for macroeconomic research and investment strategy, contributing to the investment decisions of the firm. Kieran has long experience as a macroeconomist in both the private and public sectors. He has worked most recently as Chief Markets Economist for National Australia Bank and was previously Chief Economist, Australia and New Zealand, for Barclays Bank and ABN Amro Bank/RBS. Kieran also worked as Principal Adviser on the macroeconomy and budget policy in the Commonwealth Treasury and Director of Forecasting.
........
Investment Disclaimer
Past performance does not assure future returns. All investments carry risks, including that the value of investments may vary, future returns may differ from past returns, and that your capital is not guaranteed. This information has been prepared by Coolabah Capital Investments Pty Ltd (ACN 153 327 872). It is general information only and is not intended to provide you with financial advice. You should not rely on any information herein in making any investment decisions. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information. The Product Disclosure Statement (PDS) for the funds should be considered before deciding whether to acquire or hold units in it. A PDS for these products can be obtained by visiting www.coolabahcapital.com. Neither Coolabah Capital Investments Pty Ltd, Equity Trustees Ltd (ACN 004 031 298) nor their respective shareholders, directors and associated businesses assume any liability to investors in connection with any investment in the funds, or guarantees the performance of any obligations to investors, the performance of the funds or any particular rate of return. The repayment of capital is not guaranteed. Investments in the funds are not deposits or liabilities of any of the above-mentioned parties, nor of any Authorised Deposit-taking Institution. The funds are subject to investment risks, which could include delays in repayment and/or loss of income and capital invested. Past performance is not an indicator of nor assures any future returns or risks. Coolabah Capital Investments (Retail) Pty Limited (CCIR) (ACN 153 555 867) is an authorised representative (#000414337) of Coolabah Capital Institutional Investments Pty Ltd (CCII) (AFSL 482238). Both CCIR and CCII are wholly owned subsidiaries of Coolabah Capital Investments Pty Ltd. Equity Trustees Ltd (AFSL 240975) is the Responsible Entity for these funds. Equity Trustees Ltd is a subsidiary of EQT Holdings Limited (ACN 607 797 615), a publicly listed company on the Australian Securities Exchange (ASX: EQT).
Forward-Looking Disclaimer
This presentation contains some forward-looking information. These statements are not guarantees of future performance and undue reliance should not be placed on them. Such forward-looking statements necessarily involve known and unknown risks and uncertainties, which may cause actual performance and financial results in future periods to differ materially from any projections of future performance or result expressed or implied by such forward-looking statements. Although forward-looking statements contained in this presentation are based upon what Coolabah Capital Investments Pty Ltd believes are reasonable assumptions, there can be no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. Coolabah Capital Investments Pty Ltd undertakes no obligation to update forward-looking statements if circumstances or management’s estimates or opinions should change except as required by applicable securities laws. The reader is cautioned not to place undue reliance on forward-looking statements.
5 topics
Based in Sydney, Kieran Davies is Chief Macro Strategist at Coolabah Capital Investments, an asset manager with 40 executives and over $8 billion in fixed-income strategies. Kieran is responsible for macroeconomic research and investment strategy,...
Based in Sydney, Kieran Davies is Chief Macro Strategist at Coolabah Capital Investments, an asset manager with 40 executives and over $8 billion in fixed-income strategies. Kieran is responsible for macroeconomic research and investment strategy,...
Comments
Comments
Sign In or Join Free to comment
most popular
Equities
Why "buy and manage" is the better way to invest in stocks
Livewire Markets
