9/18/23, 10:22 AM Why coming decades may bring more frequent recessions and be good for investors - MarketWatch

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Why coming decades may bring more frequent recessions — and be

good for investors
Published: Sept. 18, 2023 at 12:44 p.m. ET

By Vivien Lou Chen

A customer looks into a closed store in Larkspur, California. A team of Deutsche Bank is expecting U.S. recessions to become more frequent, ev
widely anticipated downturn hasn’t arrived.
JUSTIN SULLIVAN/GETTY IMAGES

DB -1.92% SPX +0.26% DJIA +0.23% COMP +0.21% TMUBMUSD02Y 5.053% TMUBMUSD10Y 4.316%

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9/18/23, 10:22 AM Why coming decades may bring more frequent recessions and be good for investors - MarketWatch

The unique 40-year period from 1980 to 2020 characterized by mostly economic expansion in the U.S. will likely be
replaced by a more regular pattern of boom-bust cycles and frequent recessions, according to analysts at Deutsche
Bank DB, -1.92%.

One reason is that higher inflation over the coming decades will limit central banks’ room to maneuver in and
outside the U.S., given the pressure to not sacrifice economic growth, the analysts wrote in a long-term asset return
study released on Monday. Meanwhile, with debt-to-GDP levels now at multidecade highs, there is the question of
whether U.S. deficits can continue being used by the government to extend the business cycle, considering that
borrowing costs are becoming structurally higher.

Deutsche Bank’s take includes one bright note — that frequent recessions tend to translate into stronger long-run
growth — and comes as investors and traders have been debating if and when the U.S. might slip into what some
describe as the most anticipated downturn ever. The U.S. has fallen into six recessions since January 1980, four of
which lasted just two to eight months. As of this month, the world’s largest economy has already met four of the so-
called “triggers” that Deutsche Bank says are needed over a 12-month period during a more prolonged run-up to a
recession: Increasing inflation and an inverting yield curve, as well as rising short-term rates and oil prices.

“All-in-all, we think the most likely future is one of more frequent recessions and more boom-bust cycles. Ultimately,
the long expansions of the last 40 years are likely to prove rarer moving forward,” said Jim Reid, head of global
economics and thematic research, strategist Henry Allen, and analyst Galina Pozdnyakova. “That may seem
undesirable on the face of it, but history tells us that recessions aren’t necessarily bad for growth in the long term.
Indeed, looking at our sample of G7 countries, it is the U.S. that has had the most frequent recessions, but has
stronger economic growth than its peers.”

Artificial intelligence has the potential to render some industries and jobs obsolete, and “move us away from the
managed, zombie-type world of the last couple of decades,” they wrote. “Whether it’s because the golden macro era
of 1980-2020 is behind us or whether it’s because AI will significantly disrupt the status quo, the most likely
scenario is that the era of long business cycles is over.” While this doesn’t need to be negative for long-term
economic performance, “it will clearly maintain macro volatility into a system that was used to long periods of low
volatility prior to the pandemic.”

In the U.S., recessions have made up a disproportionate amount of the 10%-plus selloffs historically seen in the S&P
500 index. The median and average drawdown in these recessions is -21% and -26%, with 1932 or the height of the
Great Depression producing the biggest selloff on record, according to Deutsche Bank.

Nonetheless, the U.S. has maintained consistently better long-term equity performance than its G7 peers given its
more business-friendly financial system, according to Deutsche Bank’s research. That is demonstrated in the data
on nominal and real multiasset class returns going back more than 200 years, where possible, for numerous
developed- and emerging-market economies.

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9/18/23, 10:22 AM Why coming decades may bring more frequent recessions and be good for investors - MarketWatch

SOURCE: DEUTSCHE BANK, GFD, ICE INDICES, BLOOMBERG LP. ANY 2023 DATA IS AS OF AUG. 31. SHADED AREAS
REFLECT NEGATIVE READINGS.

The Deutsche Bank team said its goal with the study wasn’t to answer the question of whether the U.S. or Europe
will fall into a recession soon. Rather, Reid, Allen and Pozdnyakova said they wanted to look at what history says
about the frequency, depth, and duration of recessions —along with what causes them.

Like the multiasset team at Rotterdam-based asset manager Robeco, Deutsche Bank takes a long-term view of
events and steers clear of making any outright recommendations for investors.

Read: Here’s the ‘triple power play’ that may rule stock-market returns and other assets for next 5 years

Frankfurt-based Deutsche Bank, often referred to as Wall Street’s most pessimistic bank, was the first big-name
bank to call a U.S. recession in April 2022. The firm proved to be prescient in September of that year when it saw an
almost 5% fed-funds rate on the horizon, six months before it came to fruition.

As of Monday, all three major U.S. stock indexes SPX DJIA COMP moved slightly higher in New York afternoon
trading as investors look ahead to the Federal Reserve’s policy announcement in two days. Meanwhile, 2-
BX:TMUBMUSD02Y through 10-year Treasury yields BX:TMUBMUSD10Y turned mixed.

Read: Powell could still hammer U.S. stocks on Wednesday even if the Fed doesn’t hike interest rates

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9/18/23, 10:22 AM Why coming decades may bring more frequent recessions and be good for investors - MarketWatch

This hot sector is producing returns like Nvidia’s — and it’s got nothing to do with AI

Vivien Lou Chen

Vivien Lou Chen is a Markets Reporter for MarketWatch. You can follow her on Twitter @vivienlouchen.

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