Excerpted from Lance Roberts' Street Talk Live blog [6],
The biggest problem currently is that there is virtually no expectation, or analysis that incorporates the impact, of an average economic recession ever occurring again. Since business cycle recessions have occurred with regularity throughout history; it is somewhat naive to expect that the current market trajectory will continue when we are already 48 months into the current economic expansion. The chart below, as discussed in "No Recession Now But When" [7] shows the history of U.S. recessions and their respective impact on the financial markets (note: the analysis uses monthly closing data points)
[8]
What is important for investors is an understanding that, despite claims to the contrary, a recession will occur in the future. It is simply a function of time. These recessionary drags inflict lasting damage to investment portfolios over time. The table above shows the start and finish dates, prior peak, and peak to trough price declines during previous recessionary periods. The average draw down for all recessionary periods was 30.76% with an average recovery period of 43 months. For someone close to, or in retirement, this can be devastating.
After two recessions so far in this century, which coincided with very sharp market declines, investor's portfolios have yet to recover on an inflation adjusted basis. Furthermore, and most importantly, with a large segment of the investing population heading into retirement in coming years, the demand for income, over capital appreciation, will weigh more heavily on future market growth. Many individuals are now realizing their own mortality and the critical importance of "time" as an investment variable. We simply don't live forever.
While the economy is currently not in a recession - the negative trends in the economic and earnings data certainly require monitoring. With very low lead times between non-recession and recessionary states it is very easy to get swept up in the mean reversion process as forward expectations are realigned with current earnings and economic growth trends. With a market that is driven more than ever by momentum, low volume and high-frequency trading - this reversion processes will continue to swift, and brutal, leaving investors little time to react to market changes. This time is NOT "different" - a recession will reassert itself at some point.