Declines in today’s financial markets are generally exhibiting downward trends, despite some nominal growth resulting from aggressive inflation policies from central banks. That being said, while the down-time has seemingly lasted for a long enough period of time to arguably take us to the end of it, we need to look at how it is that the last decade of recession has compared to previous periods of decline to see just how bad this one is. Specifically, by comparing the position of today’s investment markets to those during the course of comparable major downturns, we can make some assumptions about whether or not we’re nearing the end of the decline.
Looking at Federal Reserve data, we can see that there are 5 key metrics that we can use to define the last 4 periods of major recession. Specifically, we can start by looking at the real size of the decline over the total period of time of recession. Since the year 2000, the real S&P 500 returns have been a loss of 59%. However, this number is very close to the 62% decline average that most previous recessions have seen, suggesting the possibility that we might be approaching the end of the decline period.
However, this recession has only arguably lasted for 146 months, as compared to the average 214 months that the last five recessions saw, meaning that we might very well be calling it time for growth a bit too early. This means that we need to dig into some fundamental metrics to determine what sort of value is supporting this conflicting data.
The first metric to look at when examining comparative recession periods is the lowest P/E multiple that was achieved by the markets before they began an overall growth trend. Over the last five recessions we can see an average P/E multiple of 7.6x, as compared to today’s S&P multiple of approximately 13.5x. This isn’t a very good indication of recovery, because it suggests that equity valuations have come nowhere near what history has determined to be as ‘rock bottom’ pricing. From there, we can further back up this data with a look at how it is that dividend yields in the past have topped an average of 9.4% in the last five recessions.
This metric then compares to record-low dividend yields averaging 3.6%. Again, we can see that the actual metrics that are used to valuate companies on a comparative basis are suggesting that, despite the way in which the actual returns of the period are reaching similar low-points of previous recessions, we are nowhere near the ‘bottom’ point of the bear-market, as compared to previous recessions.
Given then that the macro-fundamentals surrounding this particular recession that we are in seems to demonstrate trends of severity beyond that which we have seen in the past, it leads us to a strong indication that there is room for further decline into the next few years while the overall markets continue to deleverage, and valuations continue to decline.