Everything You Need to Know About Recessions
Just like in life, markets go through peaks and valleys. The good news for investors is that often the peaks ascend to far greater heights than the depths of the valleys.
Today’s post helps to put recessions into perspective. It draws information from Capital Group to break down the frequency of economic expansions and recessions in modern U.S. history, while also showing their typical impact.
What is a Recession?
Not all recessions are the same. Some can last long while others are short. Some create lasting effects, while others are quickly forgotten. Some cripple entire economies, while others are much more targeted, impacting specific sectors within the economy.
Recession is when your neighbor loses their job. Depression is when you lose yours.
– Harry Truman
According to the National Bureau of Economic Research, a recession can be described as a significant decline in economic activity over an extended period of time, typically several months.
In the average recession, gross domestic product (GDP) is not the only thing shrinking—incomes, employment, industrial production, and retail sales tend to shrink as well. Economists generally consider two consecutive quarters of declining GDP as a recession.
The general economic model of a recession is that when unemployment rises, consumers are more likely to save than spend. This places pressure on businesses that rely on consumers’ income. As a result, company earnings and stock prices decline, which can fuel a negative cycle of economic decline and negative expectations of returns.
During economic recoveries and expansions, the opposite occurs. Rising employment encourages consumer spending, which bolsters corporate profits and stock market returns.
How Long Do Recessions Last?
Recessions generally do not last very long. According to Capital Group’s analysis of 10 cycles since 1950, the average length of a recession is 11 months, although they have ranged from eight to 18 months over the period of analysis.
Jobs losses and business closures are dramatic in the short term, though equity investments in the stock market have generally fared better. Throughout the history of economics, recessions have been relatively small blips.
|Average Expansion||Average Recession|
|S&P 500 Returns||117%||3%|
|Net Jobs Added||12M||-1.9M|
Over the last 65 years, the U.S. has been in an official recession for less than 15% of all months. In addition, the overall economic impact of most recessions is relatively small. The average expansion increased GDP by 24%, whereas the average recession decreased GDP by less than 2%.
In fact, equity returns can be positive throughout a contraction, since some of the strongest stock rallies have occurred in the later stages of a recession.
Buying the Dip: Recession Indicators
Whether you are an investor or not, it would be wise to pay attention to potential recessions and prepare accordingly.
There are several indicators that people can watch to anticipate a potential recession, which might give them an edge in preparing their portfolios:
|Recession Indicator||Why is it Important?||Average Length Until Recession|
|Inverted Yield Curve||Often a sign the U.S. Fed has hiked short-term rates too high or investors are seeking long-term bonds over riskier assets.||15.7 months|
|Corporate Profits||When profits decline, businesses cut investment, employment, and wages.||26.2 months|
|Unemployment||When unemployment rises, consumers cut back on spending.||6.1 months|
|Housing Starts||When the economic outlook is poor, home builders often cut back on housing projects.||5.3 months|
|Leading Economic Index|
Aggregation of multiple leading economic indicators. gives a broader look at the U.S. economy.
This is not a magic rubric for anticipating every economic downturn, but it helps individuals see the weather patterns on the horizon. Whether and where the storm hits is another question.
How the Top Cryptocurrencies Performed in 2021
Cryptocurrencies had a breakout year in 2021, providing plenty of volatility and strong returns across crypto’s various sectors.
The Returns of Top Cryptocurrencies in 2021
2021 saw the crypto markets boom and mature, with different sectors flourishing and largely outperforming the market leader, bitcoin.
While bitcoin only managed to return 59.8% last year, the crypto sector’s total market cap grew by 187.5%, with many of the top coins offering four and even five-digit percentage returns.
2021 Crypto Market Roundup
Last year wasn’t just a breakout year for crypto in terms of returns, but also the growing infrastructure’s maturity and resulting decorrelation of individual crypto industries and coins.
Crypto’s infrastructure has developed significantly, and there are now many more onramps for people to buy altcoins that don’t require purchasing and using bitcoin in the process. As a result, many cryptocurrency prices were more dictated by the value and functionality of their protocol and applications rather than their correlation to bitcoin.
|Ethereum||Smart Contract Platform||399.2%|
|Binance Coin||Exchange Token||1,268.9%|
|Solana||Smart Contract Platform||11,177.8%|
|Cardano||Smart Contract Platform||621.3%|
|Terra||Smart Contract Platform||12,967.3%|
|Avalanche||Smart Contract Platform||3,334.8%|
|Polkadot||Smart Contract Platform||187.9%|
Sources: TradingView, Binance, Uniswap, FTX, Bittrex
Bitcoin wasn’t the only cryptocurrency that didn’t manage to reach triple-digit returns in 2021. Litecoin and Bitcoin Cash also provided meagre double-digit percentage returns, as payment-focused cryptocurrencies were largely ignored for projects with smart contract capabilities.
Other older projects like Stellar Lumens (109%) and XRP (278%) provided triple-digit returns, with Cardano (621%) being the best performer of the old guard despite not managing to ship its smart contract functionality last year.
The Rise of the Ethereum Competitors
Ethereum greatly outpaced bitcoin in 2021, returning 399.2% as the popularity boom of NFTs and creation of DeFi 2.0 protocols like Olympus (OHM) expanded possible use-cases.
But with the rise of network activity, a 50% increase in transfers in 2021, Ethereum gas fees surged. From minimums of $20 for a single transaction, to NFT mint prices starting around $40 and going into the hundreds on congested network days, crypto’s retail crowd migrated to other smart contract platforms with lower fees.
Alternative budding smart contract platforms like Solana (11,178%), Avalanche (3,335%), and Fantom (13,207%) all had 4-5 digit percentage returns, as these protocols built out their own decentralized finance ecosystems and NFT markets.
With Ethereum set to merge onto the beacon chain this year, which uses proof of stake instead of proof of work, we’ll see if 2022 brings lower gas fees and retail’s return to Ethereum if the merge is successful.
Dog Coins Meme their Way to the Top
While many new cryptocurrencies with strong functionality and unique use-cases were rewarded with strong returns, it was memes that powered the greatest returns in cryptocurrencies this past year.
Dogecoin’s surge after Elon Musk’s “adoption” saw many other dog coins follow, with SHIB benefitting the most and returning an astounding 19.85 million percent.
But ever since Dogecoin’s run from $0.07 to a high of $0.74 in Q2 of last year, the original meme coin’s price has slowly bled -77% down to $0.17 at the time of writing. After the roller coaster ride of last year, 2022 started with a positive catalyst for Dogecoin holders as Elon Musk announced DOGE can be used to purchase Tesla merchandise.
Gamifying the Crypto Industry
The intersection between crypto, games, and the metaverse became more than just a pipe dream in 2021. Axie Infinity was the first crypto native game to successfully establish a play to earn structure that combines its native token (AXS) and in-game NFTs, becoming a sensation and source of income for many in the Philippines.
Other crypto gaming projects like Defi Kingdoms are putting recognizable game interfaces on decentralized finance applications, with the decentralized exchange becoming the town’s “marketplace” and yield farms being the “gardens” where yield is harvested. This fantasy aesthetic is more than just a new coat of paint, as the project with $1.04B of total value locked is developing an underlying play-to-earn game.
Along with gamification, 2021 saw crypto native and non-crypto developers put a big emphasis on the digital worlds or metaverses users will inhabit. Facebook’s name change to Meta resulted in the two prominent metaverse projects The Sandbox (SAND) and Decentraland (MANA) surge another few hundred percent to finish off the year at 16,261% and 4,104% returns respectively.
With so many eyes on the crypto sector after the 2021’s breakout year, we’ll see how developing U.S. regulation and changing macro conditions affect cryptocurrencies in 2022.
The Periodic Table of Commodity Returns (2012-2021)
Energy fuels led the way as commodity prices surged in 2021, with only precious metals providing negative returns.
The Periodic Table of Commodity Returns (2022 Edition)
For investors, 2021 was a year in which nearly every asset class finished in the green, with commodities providing some of the best returns.
The S&P Goldman Sachs Commodity Index (GSCI) was the third best-performing asset class in 2021, returning 37.1% and beating out real estate and all major equity indices.
This graphic from U.S. Global Investors tracks individual commodity returns over the past decade, ranking them based on their individual performance each year.
Commodity Prices Surge in 2021
After a strong performance from commodities (metals especially) in the year prior, 2021 was all about energy commodities.
The top three performers for 2021 were energy fuels, with coal providing the single best annual return of any commodity over the past 10 years at 160.6%. According to U.S. Global Investors, coal was also the least volatile commodity of 2021, meaning investors had a smooth ride as the fossil fuel surged in price.
Source: U.S. Global Investors
The only commodities in the red this year were precious metals, which failed to stay positive despite rising inflation across goods and asset prices. Gold and silver had returns of -3.6% and -11.7% respectively, with platinum returning -9.6% and palladium, the worst performing commodity of 2021, at -22.2%.
Aside from the precious metals, every other commodity managed double-digit positive returns, with four commodities (crude oil, coal, aluminum, and wheat) having their best single-year performances of the past decade.
Energy Commodities Outperform as the World Reopens
The partial resumption of travel and the reopening of businesses in 2021 were both powerful catalysts that fueled the price rise of energy commodities.
After crude oil’s dip into negative prices in April 2020, black gold had a strong comeback in 2021 as it returned 55.01% while being the most volatile commodity of the year.
Natural gas prices also rose significantly (46.91%), with the UK and Europe’s natural gas prices rising even more as supply constraints came up against the winter demand surge.
Despite being the second worst performer of 2020 with the clean energy transition on the horizon, coal was 2021’s best commodity.
High electricity demand saw coal return in style, especially in China which accounts for one-third of global coal consumption.
Base Metals Beat out Precious Metals
2021 was a tale of two metals, as precious metals and base metals had opposing returns.
Copper, nickel, zinc, aluminum, and lead, all essential for the clean energy transition, kept up last year’s positive returns as the EV batteries and renewable energy technologies caught investors’ attention.
Demand for these energy metals looks set to continue in 2022, with Tesla having already signed a $1.5 billion deal for 75,000 tonnes of nickel with Talon Metals.
On the other end of the spectrum, precious metals simply sunk like a rock last year.
Investors turned to equities, real estate, and even cryptocurrencies to preserve and grow their investments, rather than the traditionally favorable gold (-3.64%) and silver (-11.72%). Platinum and palladium also lagged behind other commodities, only returning -9.64% and -22.21% respectively.
Grains Bring Steady Gains
In a year of over and underperformers, grains kept up their steady track record and notched their fifth year in a row of positive returns.
Both corn and wheat provided double-digit returns, with corn reaching eight-year highs and wheat reaching prices not seen in over nine years. Overall, these two grains followed 2021’s trend of increasing food prices, as the UN Food and Agriculture Organization’s food price index reached a 10-year high, rising by 17.8% over the course of the year.
As inflation across commodities, assets, and consumer goods surged in 2021, investors will now be keeping a sharp eye for a pullback in 2022. We’ll have to wait and see whether or not the Fed’s plans to increase rates and taper asset purchases will manage to provide price stability in commodities.
Misc1 week ago
From Greek to Latin: Visualizing the Evolution of the Alphabet
Best of3 weeks ago
Our Top 21 Visualizations of 2021
Markets2 weeks ago
Prediction Consensus: What the Experts See Coming in 2022
Technology2 weeks ago
Companies Gone Public in 2021: Visualizing IPO Valuations
Technology2 days ago
The 20 Internet Giants That Rule the Web
Misc3 weeks ago
Mapped: Top Trending Searches of 2021 in Every U.S. State
Green3 weeks ago
Mapped: 30 Years of Deforestation and Forest Growth, by Country
Markets2 weeks ago
How Every Asset Class, Currency, and S&P 500 Sector Performed in 2021