So we’re going into a recession. There are few out there who have not yet accepted this, and the only thing left to debate is whether we’re already in a recession, and how deep the pain will be.

There are several periods in time when, as investors, we’ve been backed into a similar corner. Perhaps like many of you, I’ve never personally been through a recession with a highly vested interest in the outcome, but there are a vast majority that have.

Recession, the ’90s Version

If you were around in the recession during 1990 and into 1991, you might be feeling a bit of deja vu. You might be catching a familiar whiff of a declining housing market, with stimulation from a rash of mortgage problems. The Fed circa the early 90’s is making some of the same decisions as the Fed of ‘07-’08, declining interest rates in hopes to knock the sharp edges off what was a fairly well developed death spiral in the economy. Or so it seemed at the time, especially if you had some skin in the game.

The market at that time didn’t fair too poorly, and if you were liquid enough to ride out the decline, you probably ended up OK when all was said and done, and it really wasn’t much of a bear market.

Recession: 2001 and 70’s

The same can’t be said for the recession in the 1970’s and in 2001. Both were prodded along by traditional bear markets, and investors tried desperately to rationalize abnormally high valuations for individual companies (mainly tech in the 2001 go-round). Housing was also irrationally inflated, and much like today, it was easier to see the forest through the trees if weren’t living on either of the coasts.

The common denominator in both these time periods was sky high energy costs. More prominent in the 70’s, energy costs started to weigh on the economy, and more so than price, supply drove driving habits more so than cost.

Corner Office Thoughts

You have to understand that the markets themselves are the truest of all economic indicators. If you wait for the official numbers to be crunched by the National Bureau of Economic Research to tell you we’re in a recession, the market has a three month head start on you.

Typically the stock market will show the most volatility during the early days of a recession, regardless of whether the term “recession” is being thrown around yet or not. If you’re in a position to ride that wave, capitalize on the overzealous selloff of good companies with fundamentally sound and stoic business plans.

As my good buddy Winston once told me, don’t try to rationalize the direction of the markets, just go with it.

So how do you apply history to all of this? Well, the bottom line is that “this too shall pass”, and if you’re in your just completing your first economic cycle from the viewpoint of an investor, as I am, it’s just as important to watch and learn right now as it is to try and pick the next best stock.

And if you’re in this for the long haul, sitting on your hands while you watch your portfolio bleed may in fact be the best course of action.

What do you think? Which traits from past recessions can we apply to todays economic state?

Tags: Economics | finance history | Market Trends | recession

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