Portfolio Performance 03/31/2020 YTD Performance, Recessions, Bear Markets and Government Response

BVA Value Momentum Portfolio Strategy - Year-to-Date Performance as of March 31, 2020:

Year-to-date, the BVA Value Momentum Portfolio Strategy return is up 57.49% compared to a decline of 20.95% for the Morningstar US Market Index.

Since the start of the portfolio on January 2, 2019, the BVA Value Momentum Portfolio Strategy return is up 280.45% compared to an increase of 1.35% for the Morningstar US Market Index.

During February 11 individual stocks were forced out of the Portfolio due to a loss of momentum, as a result of the significant market decline. The decline was so broad based that I found no individual stocks meeting my criteria, to replace those which were forced out.

During March, all the remaining individual stocks were forced out of the Portfolio, as a result of the continued market decline.

Presently I find the most attractive opportunities in Volatility, Inverse Equity ETFs (Exchange-Traded Funds) and 1-to-3month short-term U.S. Treasury Bills. These investment vehicles were used in February and March to replace the individual stocks which were forced out of the Portfolio.

This tactical repositioning of the Portfolio is what accounted for the significant outperformance relative to the Total Market Index.

Returns in the Markets for the week ending 04/03/2020 were as follows:

US Major Market Indexes (The first number is each category is the 1-week performance. The second number is the year-to-date performance)

Dow Jones 30 Industrial Average (-2.70%. -26.23%). S&P 500 (-2.08%, -22.97%). NASDAQ Index (-1.72%, -17.83%). US Small-Cap Index (-7.22%, -37.05%). CBOE Volatility Index, or Fear Gage, (+28.59%, +239.62%).

US Sector ETFs

Communication Services (-1.43%, -21.19%). Consumer Discretionary (-11.11%, -7.65%). Consumer Staples (+3.44%, -11.60%). Energy (+5.29%, -49.12%). Financial (-6.52%, -35.62%). Health Care (+2.11%, -14.37%). Industrials (-4.33%, -30.28%). Materials (-3.73%, -30.14%). Real Estate (-6.12%, -23.62%). Technology (-1.87%, -15.53%). Utilities (-6.99%, -19.01%).

 Global Market ETFs

ACWI all-country World index (-2.74%, *24.30%). ACWX all-country World index ex US (-2.89%, -26.81%). AAXJ all-country Asia ex Japan (-0.34%, -20.97%). EWJ Japan (-7.19%, -21.39%). EZU Eurozone (-4.68%, -31.08%). ILF Latin America 40 Index (-4.73%, -49.63%). EEM Emerging Markets (-0.66%, -26.16%).

Commodities ETFs

DBC Commodity Tracking Index (0.00%, -28.40%). DBA Commodities Agriculture (-4.81%, -18.78%). USO United States Oil (+31.99%, -53.94%). DBB Base Metals (-1.14%, -18.67%). IAU Gold (+0.52% +7.10%). BDRY Dry Bulk Shipping (+15.560%, -59.61%).

Bond Market

In the bond market, the 10-year US Treasury interest rate went from 0.665 on February 29, to 0.599 on March 4, February 28, for a 9.91% decline on the week.

Currencies

In currencies, the US Dollar DXY Index went from 99.092 on March 31 to 100.677 on March 4.

Other Significant Events

Given the severity of the recent stock market deline and the unprecedented amount of stimulus response by the U.S. Federal Government and U.S. Federal Reserve, this is a good time to review those responses and also review a history of Recessions and Bear Stock Markets in recent U.S.History:

US Treasury vs. Federal Reserve: What’s the Difference?

The U.S. government has a vested interest in the health and welfare of the country's economy. The Department of the Treasury works hand in hand with the Federal Reserve to maintain economic stability.

The U.S. Treasury is best known for printing money (literally) and offering economic advice to the President.

The Federal Reserve is the U.S. central bank, ensuring lenders and borrowers have access to credit and loans.

The two work together to provide a stable U.S. economy and borrow money when the government needs to raise cash.

The two are instrumental in fighting recessions and bailing out institutions when necessary.

The U.S. Treasury

The Department of the Treasury, established in 1789, is the oldest of the two institutions. While it's perhaps best known for its role in collecting taxes and managing government revenue, its official mission is to "serve the American people and strengthen national security by managing the U.S. government's finances effectively, promoting economic growth and stability and ensuring the safety, soundness, and security of the U.S. and international financial systems."

To accomplish its mission, the Department provides economic advice to the President and works with other federal institutions to "encourage global economic growth, raise standards of living and to the extent possible, predict and prevent economic crises." The Department of the Treasury is also responsible for printing currency and minting coins.

The Federal Reserve

The Federal Reserve was established in 1913. It serves as the central bank of the U.S., with a mandate to "keep our money valuable and our financial system healthy." Its primary method of accomplishing this task is through its influence on monetary policy.

This effort involves ensuring that lenders and borrowers have access to money and credit. It also involves balancing the access to money through adjustments to the discount rate and federal funds rate to keep inflation in check.

Key Differences

The Department of the Treasury and Federal Reserve work together to maintain a stable U.S. economy. The Federal Reserve serves as the government's banker, processing transactions, such as accepting electronic payments for Social Security taxes, issuing payroll checks to government employees and clearing checks for tax payments and other government receivables.

The Federal Reserve and the Department of the Treasury also work together to borrow money when the government needs to raise cash. The Federal Reserve issues U.S. Treasury securities and conducts Treasury securities auctions, selling these securities on behalf of the Department of the Treasury. Examples of Treasury securities include:

• Treasury bonds
• Treasury bills
• Treasury notes
• Treasury inflation-protected securities (TIPS)

The Federal Reserve and the Department of the Treasury are linked in another way. The Federal Reserve is a nonprofit company. After its expenses are paid, any remaining profits are paid to the Department of the Treasury. The Department of the Treasury then uses that money to fund government spending. It's a relationship that produces a considerable amount.

The Federal Reserve contributed over $65.3 billion to the Treasury in 2018, according to the Federal Reserve Board (FRB). So, the Federal Reserve not only helps to make and implement policies, but it also serves as the government's bank and generates a portion of the revenue used to fund the country's activities.

Special Considerations

Fighting Recessions

When times are tough, the two entities help to formulate and put in place economic policies designed to stimulate the economy by reducing interest rates and making more money available to banks and consumers.

When a decision is made to issue tax rebates, the Department of the Treasury is responsible for taking money out of the Federal Reserve and putting it into the hands of consumers. Consumers, in turn, spend the money. Through their spending, they funnel money into the economy, resulting in increased sales of consumer goods and increased employment to create those goods.

Bailing Out Companies

The Federal Reserve and the Department of the Treasury can also work in concert to help support government-sponsored enterprises, such as Fannie Mae and Freddie Mac. When these entities run into financial trouble, the Federal Reserve can provide access to funds at a discounted borrowing rate, while the Department of the Treasury can increase the line of credit that it makes available to the entities, and even purchase their stock.

The assistance they provide can also be extended to non-governmental corporations. The near-collapse of investment bank Bear Stearns in 2008 is one such example. Officials from the two entities loaned around $29 billion in taxpayer funds to facilitate JP Morgan's purchase of Bear Stearns. While the U.S. government initiated the bailout as a Federal Reserve-led action, any losses incurred would come out of the Treasury's funds. Similar government-sponsored bailouts of non-governmental corporations took place in the airline industry in 2001, the savings and loan industry in 1989 and at Chrysler Corporation in 1979.

While the Federal Reserve and the Department of the Treasury are separate entities, they work closely together. The partnership seeks to take action at the macro level, for example, by addressing economic weakness through economic stimulus, and at the micro-level, by saving failing corporations to blunt the impact, their financial troubles would have on the economy. In this way, both entities seek to protect the financial health of the U.S.

Coronavirus Stimulus: $2 Trillion In Bailouts

The coronavirus stimulus deal reached by Congress in March will inject at least $2 trillion — and perhaps much more — into the economy. It won't prevent a deep hit to the economy, but it should facilitate recovery once public health measures get the virus under control.

Where $2 Trillion in U.S. Rescue Funds Will Go:

$532B Big Business, local government loans & financial assistance.

$61B Specific to the Airlines.

$377B Small Business loans and grants.

$290B Direct payment to families.

$290B Tax Cuts.

$260B Unemployment insurance expansion.

$150B State and local stimulus funds.

$126B Hospital restitution, veteran & other health care.

$45B FEMA.

$131B Other.

The deal provides a lifeline for small business and bailout money for U.S. airlines. It supports hospitals and states fighting the coronavirus. And it gives an infusion of cash to laid-off workers and most American households.

Airlines Get Bailouts; $500 Billion Fund

The provision includes $17 billion in federal loans for businesses that are "critical to maintaining national security." Other companies may get a share of the support.

The Treasury Department will manage the fund, which will direct $75 billion to specific industries, including $50 billion to distressed airlines. That includes $25 billion in cash grants to pay airline employees.

The other $425 billion reportedly will go to capitalize a $4.25 trillion Federal Reserve corporate lending fund, meaning the Treasury will be exposed to losses first.

The bailout money reportedly will be overseen by an inspector general and a committee comprising five members of Congress. Companies accepting funds won't be able to buy back shares until a year after the loan is paid

Small Business Gets Forgivable Coronavirus Loans

The coronavirus stimulus package also includes $367 billion for small businesses. Firms with up to 500 employees can get $10 million in forgivable loans to pay sidelined workers, as well as their rent or mortgage and utility bills for eight weeks. Presumably, if the crisis wears on, Congress would extend this aid.

Single Americans earning up to $75,000 and couples earning $150,000 will get $1,200 checks per adult and $500 per child. The one-time payment phases out at higher income levels of $99,000 for a single and $198,000 for a couple. The assistance probably won't arrive before May.

The unemployed will get a $600 monthly boost to jobless benefits for four months. Benefits will last for 39 weeks, up from the usual 26.

Hospitals and other health care providers will receive $130 billion in support to fight the coronavirus. State and local governments will receive $150 billion in the package.

Summary of Certain Federal Reserve Actions Taken Since Outbreak of COVID-19 Pandemic

The Federal Reserve System (the “Fed”) is the central bank of the United States and primarily interacts with banks and financial institutions to conduct monetary policy and promote the stability of the U.S. financial system. The Fed has taken a variety of actions to help minimize the adverse effects of the COVID-19 pandemic.

Set forth below are highlights of many of the Fed’s COVID-19 related actions.

April 9, 2020

The Federal Reserve announced a new stimulus package on April 9th, providing up to $2.3 trillion in loans, aimed to support households and employers of all sizes and bolster the ability of state and local governments to deliver critical services during the coronavirus pandemic. "The Fed's role is to provide as much relief and stability as we can during this period of constrained economic activity, and our actions today will help ensure that the eventual recovery is as vigorous as possible." said Federal Reserve Board Chair Jerome H. Powell. The move came as part of a Main Street Business Lending Program authorized by the CARES Act, the largest economic relief package ever passed by Congress.

March 27, 2020

Congress passed the Coronavirus Aid, Relief, and Economic Stimulus Act (the “CARES Act”) and made available not more than the sum of $454,000,000,000 to make loans and loan guarantees to, and other investments in, programs or facilities established by the Board of Governors of the Federal Reserve System for the purpose of providing liquidity to the financial system that supports lending to eligible businesses, states, or municipalities by—

(A) purchasing obligations or other interests directly from issuers of such obligations or other interests;

(B) purchasing obligations or other interests in secondary markets or otherwise; or

(C) making loans, including loans or other advances secured by collateral.

March 23, 2020

The Fed announced a variety of new actions including:

• Continued purchase of Treasury securities and mortgage backed securities and the addition of purchasing agency commercial mortgage-backed securities.
• Establishment of the Primary Market Corporate Credit Facility (the “PMCCF”) for new bond and loan issuance for investment grade companies.
• Establishment of the Secondary Market Corporate Credit Facility (the “SMCCF”) for secondary market corporate bond purchases issued by investment grade companies and U.S. listed exchanged traded funds.
• Establishment of the Term Asset-Backed Securities Loan Facility (the “TALF”) for loans to be made by the Fed to holders of certain AAA-rated asset backed securities backed by newly and recently originated consumer and small business loans
• Indication that the Fed “expects” to announce the establishment of a new Main Street Business Lending Program to “support lending to eligible small-and-medium sized businesses, complementing efforts by the SBA.” The CARES Act (discussed below) also references the establishment by the Board of Governors of the Federal Reserve System of a “Main Street Lending Program or other similar program that supports lending to small and mid-sized businesses.”

March 19, 2020

The Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency issued a joint statement encouraging financial institutions to work with affected customers and communities, particularly those that are low- and moderate-income, specifically identifying actions such as waving certain fees such as ATM fees, overdraft fees, and late fees, and activities that help to revitalize or stabilize low- or moderate-income geographies as well as distressed or underserved nonmetropolitan middle-income geographies, and that support community services targeted to low- or moderate-income individuals such as certain types of loans and investments

March 18, 2020

The Fed announced that it would establish a Money Market Mutual Fund Liquidity Facility, or MMLF, that will assist money market funds in meeting demands for redemptions by households and other investors, enhancing overall market functioning and credit provision to the broader economy. The MMLF program is structured similarly to the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, or AMLF, that operated from late 2008 to early 2010

March 17, 2020

The Fed announced the establishment of a Commercial Paper Funding Facility (CPFF). Commercial paper markets finance a wide range of activities such as funding for auto loans and mortgages as well as liquidity to meet the operational needs of a range of companies. The CPFF was created to provide a liquidity backstop to U.S. issuers of commercial paper through a special purpose vehicle (SPV) that will purchase unsecured and asset-backed commercial paper rated A1/P1 (as of March 17, 2020) directly from eligible companies. The Fed noted that “[t]he commercial paper market has been under considerable strain in recent days as businesses and households face greater uncertainty in light of the coronavirus outbreak. By eliminating much of the risk that eligible issuers will not be able to repay investors by rolling over their maturing commercial paper obligations, this facility should encourage investors to once again engage in term lending in the commercial paper market. An improved commercial paper market will enhance the ability of businesses to maintain employment and investment as the nation deals with the coronavirus outbreak.”

March 15, 2020

The Fed announced a variety of actions to support the flow of credit to households and businesses, including (1) lowering its primary credit rate (the rate that depository institutions pay the Fed on certain borrowed funds) by 150 basis points (1.50%) to 0.25%, (2) permitting depository institutions to borrow from the Fed for short-term periods as long as 90 days, (3) encouraging depository institutions to utilize intraday credit extensions from Reserve Banks and to use their capital and liquidity buffers to lend, and (4) effective March 26, 2020, reducing depository institutions’  reserve requirements to support lending to households and business.

March 15, 2020

The Fed announced a Coordinated Central Bank Action among The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank to enhance the provision of liquidity via the standing U.S. dollar liquidity swap line arrangements by lowering the pricing on the standing U.S. dollar liquidity swap arrangements by 25 basis points

March 03, 2020

In one of its earliest announcements directly addressing “the coronavirus” (as it was still referred to on March 3, 2020), the Fed issued a statement advising that the coronavirus posed “evolving risks” to U.S. economic activity, and in light of such risks, the Federal Open Market Committee (the “FOMC”) lowered the target range for the federal funds rate by 0.5%, to 1.25%.

A Review of Past Depressions and Recessions

Great Depression History

The Great Depression was the worst economic downturn in the history of the industrialized world, lasting from the stock market crash of 1929 to 1939.

It began after the stock market crash of October 1929, which sent Wall Street into a panic and wiped out millions of investors. Over the next several years, consumer spending and investment dropped, causing steep declines in industrial output and employment as failing companies laid off workers. By 1933, when the Great Depression reached its lowest point, some 15 million Americans were unemployed and nearly half the country’s banks had failed.

What Caused the Great Depression?

Throughout the 1920s, the U.S. economy expanded rapidly, and the nation’s total wealth more than doubled between 1920 and 1929, a period dubbed “the Roaring Twenties.”

The stock market, centered at the New York Stock Exchange on Wall Street in New York City, was the scene of reckless speculation, where everyone from millionaire tycoons to cooks and janitors poured their savings into stocks. As a result, the stock market underwent rapid expansion, reaching its peak in August 1929.

By then, production had already declined and unemployment had risen, leaving stock prices much higher than their actual value. Additionally, wages at that time were low, consumer debt was proliferating, the agricultural sector of the economy was struggling due to drought and falling food prices and banks had an excess of large loans that could not be liquidated.

The American economy entered a mild recession during the summer of 1929, as consumer spending slowed and unsold goods began to pile up, which in turn slowed factory production. Nonetheless, stock prices continued to rise, and by the fall of that year had reached stratospheric levels that could not be justified by expected future earnings.

Stock Market Crash of 1929

On October 24, 1929, as nervous investors began selling overpriced shares en masse, the stock market crash that some had feared happened at last. A record 12.9 million shares were traded that day, known as “Black Thursday.”

Five days later, on October 29 or “Black Tuesday,” some 16 million shares were traded after another wave of panic swept Wall Street. Millions of shares ended up worthless, and those investors who had bought stocks “on margin” (with borrowed money) were wiped out completely.

As consumer confidence vanished in the wake of the stock market crash, the downturn in spending and investment led factories and other businesses to slow down production and begin firing their workers. For those who were lucky enough to remain employed, wages fell and buying power decreased.

Many Americans forced to buy on credit fell into debt, and the number of foreclosures and repossessions climbed steadily. The global adherence to the gold standard, which joined countries around the world in a fixed currency exchange, helped spread economic woes from the United States throughout the world, especially Europe.

Bank Runs and the Hoover Administration

Despite assurances from President Herbert Hoover and other leaders that the crisis would run its course, matters continued to get worse over the next three years. By 1930, 4 million Americans looking for work could not find it; that number had risen to 6 million in 1931.

Meanwhile, the country’s industrial production had dropped by half. Bread lines, soup kitchens and rising numbers of homeless people became more and more common in America’s towns and cities. Farmers couldn’t afford to harvest their crops, and were forced to leave them rotting in the fields while people elsewhere starved. In 1930, severe droughts in the Southern Plains brought high winds and dust from Texas to Nebraska, killing people, livestock and crops. The “Dust Bowl” inspired a mass migration of people from farmland to cities in search of work.

In the fall of 1930, the first of four waves of banking panics began, as large numbers of investors lost confidence in the solvency of their banks and demanded deposits in cash, forcing banks to liquidate loans in order to supplement their insufficient cash reserves on hand.

Bank runs swept the United States again in the spring and fall of 1931 and the fall of 1932, and by early 1933 thousands of banks had closed their doors.

In the face of this dire situation, Hoover’s administration tried supporting failing banks and other institutions with government loans; the idea was that the banks in turn would loan to businesses, which would be able to hire back their employees.

Roosevelt Elected

Hoover, a Republican who had formerly served as U.S. secretary of commerce, believed that government should not directly intervene in the economy, and that it did not have the responsibility to create jobs or provide economic relief for its citizens.

In 1932, however, with the country mired in the depths of the Great Depression and some 15 million people (more than 20 percent of the U.S. population at the time) unemployed, Democrat Franklin D. Roosevelt won an overwhelming victory in the presidential election.

By Inauguration Day (March 4, 1933), every U.S. state had ordered all remaining banks to close at the end of the fourth wave of banking panics, and the U.S. Treasury didn’t have enough cash to pay all government workers. Nonetheless, FDR (as he was known) projected a calm energy and optimism, famously declaring "the only thing we have to fear is fear itself.”

Roosevelt took immediate action to address the country’s economic woes, first announcing a four-day “bank holiday” during which all banks would close so that Congress could pass reform legislation and reopen those banks determined to be sound. He also began addressing the public directly over the radio in a series of talks, and these so-called “fireside chats” went a long way towards restoring public confidence.

During Roosevelt’s first 100 days in office, his administration passed legislation that aimed to stabilize industrial and agricultural production, create jobs and stimulate recovery.

In addition, Roosevelt sought to reform the financial system, creating the Federal Deposit Insurance Corporation (FDIC) to protect depositors’ accounts and the Securities and Exchange Commission (SEC) to regulate the stock market and prevent abuses of the kind that led to the 1929 crash.

The New Deal: A Road to Recovery

Among the programs and institutions of the New Deal that aided in recovery from the Great Depression were the Tennessee Valley Authority (TVA), which built dams and hydroelectric projects to control flooding and provide electric power to the impoverished Tennessee Valley region, and the Works Progress Administration (WPA), a permanent jobs program that employed 8.5 million people from 1935 to 1943.

When the Great Depression began, the United States was the only industrialized country in the world without some form of unemployment insurance or social security. In 1935, Congress passed the Social Security Act, which for the first time provided Americans with unemployment, disability and pensions for old age.

After showing early signs of recovery beginning in the spring of 1933, the economy continued to improve throughout the next three years, during which real GDP (adjusted for inflation) grew at an average rate of 9 percent per year.

A sharp recession hit in 1937, caused in part by the Federal Reserve’s decision to increase its requirements for money in reserve. Though the economy began improving again in 1938, this second severe contraction reversed many of the gains in production and employment and prolonged the effects of the Great Depression through the end of the decade.

Depression-era hardships had fueled the rise of extremist political movements in various European countries, most notably that of Adolf Hitler’s Nazi regime in Germany. German aggression led war to break out in Europe in 1939, and the WPA turned its attention to strengthening the military infrastructure of the United States, even as the country maintained its neutrality.

Great Depression Ends and World War II Begins

With Roosevelt’s decision to support Britain and France in the struggle against Germany and the other Axis Powers, defense manufacturing geared up, producing more and more private sector jobs.

The Japanese attack on Pearl Harbor in December 1941 led to America’s entry into World War II, and the nation’s factories went back in full production mode.

This expanding industrial production, as well as widespread conscription beginning in 1942, reduced the unemployment rate to below its pre-Depression level. The Great Depression had ended at last, and the United States turned its attention to the global conflict of World War II.

Recessions

There have been several recessions in the U.S. since the Great Depression of the 1930s.

Let's take a look at some of these recessions, how long they lasted, how they affected gross domestic product (GDP) and unemployment, and what is known about what caused them.

What's a Recession?

A recession historically has been defined as two consecutive quarters of decline in GDP, the combined value of all the goods and services produced in the U.S. It differs from the gross national product (GNP) in that it does not include the value of goods and services produced by U.S. companies abroad or goods and services received in the U.S. as imports.

The Roosevelt Recession: (May 1937 - June 1938)

• Duration: 13 months
• Magnitude:
• GDP Decline: 3.4%
• Unemployment Rate: 19.1% (more than four million unemployed)
• Reasons and Causes: The stock market crashed in late 1937. Businesses blamed the "New Deal", a series of government-financed infrastructure work projects through the Works Projects Administration (WPA) and Civilian Conservation Corps (CCC). These camps provided work and room and board for more than 250,000 men. The government blamed a "capital strike" (lack of investment) on the part of businesses while "New Dealers" blamed cuts in WPA funding. The first Social Security insurance deductions pulled $2 billion out of circulation at this time.

The Union Recession: (February 1945 - October 1945)

• Duration: Nine months
• Magnitude:
• GDP Decline: 11%
• Unemployment Rate: 1.9%
• Reasons and Causes: The tail-end of World War II, the beginning of demobilization of military forces, and the slow transition to civilian production marked this period. War production had virtually ceased and veterans were just beginning to re-enter the workforce. It was also known as the "Union Recession," as unions were beginning to reassert themselves. Minimum wages were on the rise and credit was tight.

The Post-War Recession: (November 1948 - October 1949)

• Duration: 11 months
• Magnitude:
• GDP Decline: 1.1%
• Unemployment Rate: 5.9%
• Reasons and Causes: As returning veterans returned to the workforce in large numbers to compete for jobs with existing civilian workers who had entered the workforce during the war, unemployment began to rise. The government's response was minimal as it was much more worried about inflation than unemployment at the time.

The Post-Korean War Recession: (July 1953 - May 1954)

• Duration: 10 months
• Magnitude:
• GDP decline: 2.2%
• Unemployment Rate: 2.9% (lowest rate since WWII)
• Reasons and causes: After an inflationary period that followed the Korean War, more dollars were directed at national security. The Federal Reserve tightened monetary policy to curb inflation in 1952. The dramatic change in interest rates caused increased pessimism about the economy and decreased aggregate demand.

The Eisenhower Recession: (August 1957 - April 1958)

• Duration: Eight months
• Magnitude:
• GDP Decline: 3.3%
• Unemployment Rate: 6.2%
• Reasons and Causes: The government tightened monetary policy to years prior to the recession to curb inflation, but prices continued to rise in the U.S. through 1959. The sharp worldwide recession and the strong U.S. dollar contributed to a foreign trade deficit.

The "Rolling Adjustment" Recession: (April 1960 - February 1961)

• Duration: 10 months
• Magnitude:
• GDP Decline: 2.4%
• Unemployment Rate: 6.9%
• Reasons and Causes: This recession was also known as the "rolling adjustment" for many major U.S. industries, including the automotive industry. Americans shifted to buying compact and often foreign-made cars and industry drew down inventories. Gross national product (GNP) and product demand declined.

The Nixon Recession: (December 1969 - November 1970)

• Duration: 11 months
• Magnitude:
• GDP Decline: 0.8%
• Unemployment Rate: 5.5%
• Reasons and Causes: Increasing inflation caused the government to employ a very restrictive monetary policy. The structure of government expenditures added to the contraction in economic activity.

The Oil Crisis Recession: (November 1973 - March 1975)

• Duration: 16 months
• Magnitude:
• GDP Decline: 3.6%
• Unemployment Rate: 8.8%
• Reasons and Causes: This long, deep recession was brought on by the quadrupling of oil prices and high government spending on the Vietnam War. This led to stagflation and high unemployment. Unemployment finally reached 9% in May of 1975.

The Energy Crisis Recession: (January 1980 - July 1980)

• Duration: Six months
• Magnitude:
• GDP decline: 1.1%
• Unemployment Rate: 7.8%
• Reasons and Causes: Inflation had reached 13.5% and the Federal Reserve raised interest rates and slowed money supply growth, which slowed the economy and caused unemployment to rise. Energy prices and supply were put at risk causing a confidence crisis as well as inflation.

The Iran/Energy Crisis Recession: (July 1981 - November 1982)

• Duration: 16 months
• Magnitude:
• GDP decline: 3.6%
• Unemployment Rate: 10.8%
• Reasons and Causes: This long and deep recession was caused by the regime change in Iran. The world's second-largest producer of oil at the time, the country came to regard the U.S. as a supporter of its ousted regime. The "New" Iran exported oil at inconsistent intervals and at lower volumes, forcing prices higher. The U.S. government enforced a tighter monetary policy to control rampant inflation, which had been carried over from the previous two oil and energy crises. The prime rate reached 21.5% in 1982.

The Gulf War Recession: (July 1990 - March 1991)

• Duration: Eight months
• Magnitude:
• GDP Decline: 1.5%
• Unemployment Rate: 6.8%
• Reasons and causes: Iraq invaded Kuwait. This resulted in a spike in the price of oil in 1990, which caused manufacturing trade sales to decline. This was combined with the impact of manufacturing moving offshore as the provisions of the North American Free Trade Agreement (NAFTA) kicked in. In addition, the leveraged buyout of United Airlines triggered a stock market crash.

The 9/11 Recession: (March 2001 - November 2001)

• Duration: Eight months
• Magnitude:
• GDP Decline: 0.3%
• Unemployment Rate: 5.5%
• Reasons and Causes: The collapse of the dotcom bubble, the 9/11 attacks, and a series of accounting scandals at major U.S. corporations contributed to this relatively mild contraction of the U.S. economy. In the next few months, GDP recovered to its former level

The Great Recession

The Great Recession was a period of marked general decline (recession) observed in national economies globally during the late 2000s and early 2010s. The scale and timing of the recession varied from country to country. The International Monetary Fund (IMF) has concluded that it was the most severe economic and financial meltdown since the Great Depression.

The causes of the Great Recession include a combination of vulnerabilities that developed in the financial system, along with a series of triggering events that began with the bursting of the United States housing bubble in 2005–2006. When housing prices fell and homeowners began to walk away from their mortgages, the value of mortgage-backed securities held by investment banks declined in 2007–2008, causing several to collapse or be bailed out in September 2008. This 2007–2008 phase was called the Subprime mortgage crisis. The combination of banks unable to provide funds to businesses, and homeowners paying down debt rather than borrowing and spending, resulted in the Great Recession that began in the U.S. officially in December 2007 and lasted until June 2009, thus extending over 19 months. As with most of other recessions, it appears that no known formal theoretical or empirical model was able to accurately predict the advance of this recession, except for minor signals in the sudden rise of forecasted probabilities, which were still well under 50%.

The recession was not felt equally around the world; whereas most of the world's developed economies, particularly in North America, South America and Europe, fell into a severe, sustained recession, many more recently developed economies suffered far less impact, particularly China, India and Poland, whose economies grew substantially during this period – similarly, the highly developed country of Australia was unaffected, having experienced uninterrupted growth since the early 1990s.

Effects on the United States

The Great Recession had a significant economic and political impact on the United States. While the recession technically lasted from December 2007 – June 2009 (the nominal GDP trough), many important economic variables did not regain pre-recession (November or Q4 2007) levels until 2011–2016. For example, real GDP fell $650 billion (4.3%) and did not recover its $15 trillion pre-recession level until Q3 2011. Household net worth, which reflects the value of both stock markets and housing prices, fell $11.5 trillion (17.3%) and did not regain its pre-recession level of $66.4 trillion until Q3 2012. The number of persons with jobs (total non-farm payrolls) fell 8.6 million (6.2%) and did not regain the pre-recession level of 138.3 million until May 2014. The unemployment rate peaked at 10.0% in October 2009 and did not return to its pre-recession level of 4.7% until May 2016.

A key dynamic slowing the recovery was that both individuals and businesses paid down debts for several years, as opposed to borrowing and spending or investing as had historically been the case. This shift to a private sector surplus drove a sizable government deficit. However, the federal government held spending at about $3.5 trillion from fiscal years 2009-2014 (thereby decreasing it as a percent of GDP), a form of austerity. Then-Fed Chair Ben Bernanke explained during November 2012 several of the economic headwinds that slowed the recovery:

• The housing sector did not rebound, as was the case in prior recession recoveries, as the sector was severely damaged during the crisis. Millions of foreclosures had created a large surplus of properties and consumers were paying down their debts rather than purchasing homes.
• Credit for borrowing and spending by individuals (or investing by corporations) was not readily available as banks paid down their debts.
• Restrained government spending following initial stimulus efforts (i.e., austerity) was not sufficient to offset private sector weaknesses.

On the political front, widespread anger at banking bailouts and stimulus measures (begun by President George W. Bush and continued or expanded by President Obama) with few consequences for banking leadership, were a factor in driving the country politically rightward starting in 2010. The Troubled Asset Relief Program (TARP) was the largest of the bailouts. In 2008, TARP allocated $426.4 billion to various major financial institutions. However, the US collected $441.7 billion in return from these loans in 2010, recording a profit of $15.3 billion. Nonetheless, there was a political shift from the Democratic party. Examples include the rise of the Tea Party and the loss of Democratic majorities in subsequent elections. President Obama declared the bailout measures started under the Bush administration and continued during his administration as completed and mostly profitable as of December 2014. As of January 2018, bailout funds had been fully recovered by the government, when interest on loans is taken into consideration. A total of $626B was invested, loaned, or granted due to various bailout measures, while $390B had been returned to the Treasury. The Treasury had earned another $323B in interest on bailout loans, resulting in an $87B profit. Economic and political commentators have argued the Great Recession was also an important factor in the rise of populist sentiment that resulted in the election of President Trump in 2016, and left-wing populist Bernie Sanders' candidacy for the Democrat nomination.

United States Policy Responses

The U.S. government passed the Emergency Economic Stabilization Act of 2008 (EESA or TARP) during October 2008. This law included $700 billion in funding for the "Troubled Assets Relief Program" (TARP). Following a model initiated by the United Kingdom bank rescue package, $205 billion was used in the Capital Purchase Program to lend funds to banks in exchange for dividend-paying preferred stock.

On 17 February 2009, U.S. President Barack Obama signed the American Recovery and Reinvestment Act of 2009, an $787 billion stimulus package with a broad spectrum of spending and tax cuts. Over $75 billion of the package was specifically allocated to programs which help struggling homeowners. This program was referred to as the Homeowner Affordability and Stability Plan.

The U.S. Federal Reserve (central bank) lowered interest rates and significantly expanded the money supply to help address the crisis. The New York Times reported in February 2013 that the Fed continued to support the economy with various monetary stimulus measures: The Fed, which has amassed almost $3 trillion in Treasury and mortgage-backed securities to promote more borrowing and lending, is expanding those holdings by $85 billion a month until it sees clear improvement in the labor market. It plans to hold short-term interest rates near zero even longer.

The Bottom Line

So what do all these very different recessions have in common?

For one, oil price, demand and supply sensitivity appear to be consistent, and frequent historical precursors to U.S. recessions. A spike in oil prices has preceded nine out of 10 post-WWII recessions. This highlights that while global integration of economies allows for more effective cooperative efforts between governments to prevent or mitigate future recessions, the integration itself ties the world economies more closely together, making them more susceptible to problems outside their borders.

Better government safeguards should soften the effects of recessions as long as regulations are in place and enforced. Better communications technology and sales and inventory tracking allow businesses and governments to have better transparency on a real time basis so that corrective actions are made to forestall the accumulation of factors and indicators contributing to or signaling a recession.

More recent recessions, such as the housing bubble, the resulting credit crisis, and the subsequent government bailouts are examples of excesses not properly or competently regulated by the patchwork of government regulation of financial institutions.

Contraction and expansion cycles of moderate amplitude are part of the economic system. World events, energy crises, wars, and government intervention in markets can affect economies both positively and negatively and will continue to do so in the future. Expansions have historically exceeded previous highs in economic growth trends if capitalist fundamentals applied within regulatory guidelines govern the markets.

A Brief History of U.S. Bear Markets

On March 11, 2020, the Dow Jones Industrial Average (DJIA) entered a bear market for the first time in 11 years, falling from all-time highs approaching 30,000 to under 19,000 in just a few short weeks amid the global coronavirus pandemic. The next day, March 12, 2020, the S&P 500 and the Nasdaq followed suit. The bear market in U.S. equities in 2020 could go down as one of the most severe bear markets in history. But, it will by no means be the first, nor the last.

Key Takeaways

• Bear markets are defined as sustained periods of downward trending stock prices, often triggered by a 20% decline from near-term highs.
• Bear markets are often accompanied by an economic recession and high unemployment, but bear markets can also be great buying opportunities while prices are depressed.
• Some of the biggest bear markets in the past century include those that coincided with the Great Depression and Great Recession.
• The bear market that began on March 11, 2020 was brought on by many factors including the spread of the COVID19 pandemic.

When The Bear Comes

One definition of a bear market says markets are in bear territory when stocks, on average, fall at least 20% off their high. But 20% is an arbitrary number, just as a 10% decline is an arbitrary benchmark for a correction.

Another definition of a bear market is when investors are more risk-averse than risk-seeking. This kind of bear market can last for months or years as investors shun speculation in favor of boring, sure bets.

Several leading stock market indexes around the globe endured bear market declines in 2018. In the U.S. in December, the small cap Russell 2000 Index (RUT) bottomed out 27.2% below its prior high. The widely-followed U.S. large cap barometer, the S&P 500 Index (SPX), just missed entering bear market territory, halting its decline 19.8% below its high.

Similarly, oil prices were in a bear market May 2014 to February 2016. During this period oil prices fell continually and unevenly until they reached a bottom.

Bear markets can happen in sectors and in the broadest markets. The longest time horizon for investors is usually the time between now and whenever they will need to liquidate their investments (for example, during retirement), and over the longest-possible term, bull markets have gone higher and laster longer than bear markets.

History and Duration of Bear Markets.

Bears of All Shapes and Sizes

Bear markets have come in all shapes and sizes, showing significant variation in depth and duration.

The bear market that started in March of 2020 began due to a number of factors including shrinking corporate profits and possibly the sheer length of the 11-year bull market that preceded it. The immediate cause of the bear market was a combination of persistent worries about the effect of the COVID19 pandemic on the world economy and an unfortunate price war in oil markets between Saudi Arabia and Russia that sent oil prices plunging to levels not seen since the bursting of the dotcom bubble in 2000, 9/11 2001, and the second Gulf War.

Between 1926 and 2017, there have been eight bear markets, ranging in length from six months to 2.8 years, and in severity from an 83.4% drop in the S&P 500 to a decline of 21.8%, according to analysis by First Trust Advisors based on data from Morningstar Inc. The correlation between these bear markets and recessions is imperfect.

At the end of 2019, analysts suspected a bear market might be coming, but they were divided on its duration and severity. For example, Stephen Suttmeier, the chief equity technical strategist at Bank of America Merrill Lynch, said he believed there would be a "garden-variety bear market" that would last only six months, and not go much beyond a 20% dip. At the other end of the spectrum, hedge fund manager and market analyst John Hussman predicted a cataclysmic 60% rout.

Bear Markets Without Recessions

Three of the eight bear markets were not accompanied by economic recessions, according to FirstTrust. These included brief six month pullbacks in the S&P 500 of 21.8% in the late 1940s and 22.3% in the early 1960s. The stock market crash of 1987 is the most recent example, which was a 29.6% drop lasting only three months, according to First Trust.

Concerns about excessive equity valuations, with selling pressures exacerbated by computerized program trading, are widely recognized as the trigger for that brief bear market.

Bear Markets Before Recessions

In three other bear markets, the stock market decline began before a recession officially got underway. The dotcom crash of 2000-2002 also was spurred by a loss of investor confidence in stock valuations that had reached new historic highs.

The S&P 500 tumbled by 44.7% over the course of 2.1 years, punctuated by a brief recession in the middle. Stock market declines of 29.3% in the late 1960s and 42.6% in the early 1970s, lasting 1.6 years and 1.8 years, respectively, also began ahead of recessions, and ended shortly before those economic contractions bottomed out.

Some of The Nastiest Bear Markets (So Far)

The two worst bear markets of this era were roughly in sync with recessions. The Stock Market Crash of 1929 was the central event in a grinding bear market that lasted 2.8 years and sliced 83.4% off the value of the S&P 500.

Rampant speculation had created a valuation bubble, and the onset of the Great Depression, itself caused partly by the Smoot-Hawley Tariff Act and partly by the Federal Reserve's decision to rein in speculation with a restrictive monetary policy, only worsened the stock market sell-off.

The bear market of 2007-2009 lasted 1.3 years and sent the S&P 500 down by 50.9%. The U.S. economy had slipped into a recession in 2007, accompanied by a growing crisis in subprime mortgages, with increasing numbers of borrowers unable to meet their obligations as scheduled. This eventually snowballed into a general financial crisis by September 2008, with systemically important financial institutions (SIFIs) across the globe in danger of insolvency.

Complete collapses in the global financial system and the global economy were averted in 2008 by unprecedented interventions by central banks around the world. Their massive injections of liquidity into the financial system, through a process called quantitative easing (QE), propped up the world economy and the prices of financial assets such as stocks by pushing interest rates down to record low levels.

The Bottom Line

The most recent bear market is a combination of a global health crisis, compounded by fear, which has triggered a wave of layoffs, corporate shutdowns, and financial disruptions. But, we will get through this - and this is not the first bear market that we've experienced. As noted above, the methods for measuring the length and magnitude of bull and bear markets alike differ among analysts. According to criteria employed by Yardeni Research, for example, there have been 20 bear markets since 1928.

Thank you and please stay tuned for more upcoming reports.

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Len Martinez is a Financial Consultant. Information in the "Bull Valley Advisor” newsletter should not be considered as investment advice or an offer to buy or sell securities. Data is derived from sources considered to be reliable including Morningstar, StockCharts.com, YAHOO Finance, FINVIZ, TipRanks, Investing.com, ECRI, OCED, gurufocus, Crestmont Research, Trading Economics and S2O. Results are not guaranteed. Len Martinez is not an RIA. The data is shown for informational purposes and should not be considered investment advice or an offer to buy or sell securities.