Recessions

Economic Recession

Recession alarm bells have been ringing over the past few years. If you’re like most Americans, you’re probably wondering if you should be concerned. Before hitting the panic button, take the time to read this article to learn what an economic recession is, what causes it, and how it can impact the health of your wealth.

What Is an Economic Recession?

An economic recession refers to a period of temporary economic decline during which trade and industrial activity are reduced. It is typically recognized after six months of decline or a fall in GDP over two consecutive quarters. Since 1925, the United States has experienced 15 recessions – 11 of those 15 recessions occurred from 1925 to 1981.

• October 1926 – November 1927
• August 1929 – March 1933
• May 1937 – July 1938
• February 1945 – October 1945
• November 1948 – October 1949
• July 1953 – May 1954
• August 1957 – April 1958
• April 1960 – February 1961
• December 1969 – November 1970
• November 1973 – March 1974
• January 1980 – July 1980
• July 1981 – November 1982
• July 1990 – March 1991
• March 2001 – November 2002
• December 2007 – June 2009

What Causes an Economic Recession

Most recessions are caused by a combination of four factors:

1. Low consumer confidence: when consumers think the economy is bad, they spend less money.
2. High interest rates: reduce the amount of money that can be invested.
3. Reduced wages:
   1. consumers’ paychecks are not adjusted for inflation.
   2. resulting in reduced purchasing power.
4. Inflation: reduces the amount of goods and services that a consumer can purchase.

What Are the Effects of a Recession?

It should come as no surprise that an economic recession can have devastating effects on the economy and your daily life. People from all walks of life and economic backgrounds are subject to the effects of a recession. Typically, the longer the recession, the more hardships you will face. Let’s take a look at some of the most common effects an economic recession can have on your life.

• Employment: keeping and finding employment becomes harder during an economic recession – companies cut fixed and variable costs to break even and/or grow.
• Debt: net worth tends to decline as loans are acquired to pay for necessities.
• Investments: lack of income can also hinder your ability to make short-term and long-term investments, causing an uncertain financial future.
• Lifestyle changes: reduced income affects your ability to pay for hobbies (e.g., gym membership, vacation, etc.).

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Bull and Bear Markets

Bull Market vs Bear Market

You’ve likely heard of the term “bull” and “bear” market conditions. But do you know what they mean and how they can affect you? If not, we’re here to help. This article explores the differences between the bull market and bear market. Keep reading to learn how these market conditions impact your personal investments.

What Is a Bull Market?

The bull market is characterized as a period of a rising stock market. The bull attacks its enemies by thrusting its horns up into the air, hence the name. A bull market begins at the lowest point reached after the stock market has fallen by 20% or more. The bull market ends when it reaches its highest point.

What Is a Bear Market?

On the other hand, the bear market is defined as a period of a declining stock market. The bear market gets its name because a bear attacks its enemies by swiping its massive paws downward. A bear market is a period when the stock market declines by 20% or more from its previous high to its next low.

Bear Market and Bull Market Recovery Period

The recovery period starts at the lowest point reached after the stock market has fallen by 20% or more and ends when it reaches its previous high.

Bull and Bear Market Examples

To get a better understanding of bull and bear markets, let’s take a look into our economic history. We’ll begin in the post-war modern day. It’s safe to assume we can all agree the world is a much different place since WWII. The bull market that began in 1950 (which came off of a brief 6-month bear market) was the longest in the post-war era. It lasted 181 months – that’s over 15 years! The total return over that period is 929% or 17% annualized return. The bull eventually ended with a 22% decline that lasted a mere 6 months. The next bull market ran for the following 77 months or 6 ½ years. This resulted in 144% total return or 15% annualized.

Bear Market: 1960s

The next bear market occurred during the 1960s, which stretched 19 months and had a 29% decline. The bear market was caused by race riots – the assassination of Dr. Martin Luther King Jr. – much to do with the bear. The next bull market was the shortest one on record, lasting for only 30 months. It was up 76% or an annualized 25% (since it was only 2 ½ years long).

Bear Market: 1970s

The early 1970s are not a desirable period to recall because it was plagued with high oil prices, the oil embargo, President Nixon’s resignation, etc. It should come as no surprise that the country experienced a bear market from 1973 to 1974 that lasted 21 months, resulting in a damaging 43% decline.

Bull Market: 1970s–1980s

The next bull market technically runs from that lowest point in the mid-’70s for 155 months. That’s a very long stretch, but it’s because the malaise of the second half of the 1970s was not technically negative but stagnant. America went through a brief period of stagnation through the 1970s into the early 1980s. What’s interesting is that we had a double-dip recession in 1980 and then in 1981–1982. However, the stock market did not experience a bear market during either recession.

This should be a reminder to everyone who is shaking over any potential recessions to come. This bull market didn’t come to an end until the big crash of 1987. Yes, it was October aka the scariest month of the year. This bear market was NOT accompanied by a recession either. It lasted a mere 3 months with a 30% decline (20% of it took place on one day!).

Bull Market: 1980s–1990s

The next bull market ran from the late 1980s through all of the 1990s. Keep in mind there was a recession in 1990. This bull market was 153 months long (almost 13 years!), up 833% or 19% annualized.

Bear to Bull to Bear Market: 2000s

Cue the first decade of the new millennium, 2000–2009, and boy was this a tough one. Y2K, 9/11, Enron, the Iraq War, and the housing crisis led to a financial panic. As a result, we had two bear markets or two very damaging bears. The first bear was 25 months of torture and a 44% decline. We then spent the next five years recovering those losses. We did get a bull market then that lasted 61 months – 109% or 16% annualized. The next bear market left scars on many people reading this now. The bear of 2008–2009 was terrible. 16 months – 50%. Remember when every morning a new bank was going bust? Yuck!

We are still riding the bull market since we all picked ourselves up and dusted the dirt off our shoulders from the housing and banking crisis. As of writing this section, we stand at 127 months and a 343% return. When will the next recession be? When will the bull end? Will there be a recession but no bear? Stay tuned! I’ve got the answers.

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Diversification Matters

Diversification Matters

Diversification is one of the most important investing rules all investors should know. The old cliché “don’t put all your eggs in one basket” is correct. You really shouldn’t do it. Keep reading to learn about the importance of diversifying your investments.

What Is Diversification?

Diversification is the act of allocating your capital in a way that reduces your exposure to any one particular asset or risk. Use the Callan Periodic Table of Investment Returns to follow along.

Callan Periodic Table of Investment Returns

The Callan Periodic Table of Investment Returns demonstrates that the market can function and flow in many ways from year to year. The Callan Periodic Table of Investment Returns ranks each category box from highest to lowest return over each calendar year. For instance, 2018 was a very low return year across almost all boxes. First place goes to Cash Equivalent, +1.87%; next is U.S. Bonds, +0.01%. In a year like 2018 of negative stock markets, the number-one return comes from the safest and most stable category. Meanwhile, Emerging Markets, -14.58%; Non-U.S. Stocks, -14.09%; Small Companies, -11.01%. Large U.S. Companies were -4.38% – not great, but not -15%.

While there may not seem to be much rhyme or reason to the stock market’s wild swings between winners and losers, there’s a clear case to be made that diversification is the best strategy over the long haul. Dissecting the stock market into categories and then tracking those dissected categories as a whole and individual relative to each other can help you learn a lot about how the markets tick over time. While the stock market can be broken into many different categories, for this example we will use Asset Classes (stocks vs bonds), Capitalization (large vs small), and Equity Markets (U.S. vs non-U.S.). Let’s take a look.

Stocks

• Large U.S. Companies
• Small U.S. Companies
• Non-U.S. Companies
• Emerging Markets

Bonds

• U.S. Bonds: Fixed Income
• Non-U.S. Bonds: Fixed Income
• High Yield Bonds

Stable Cash

• Cash Equivalent

Real Estate

• Real Estate

Stock Market Changes

2017 was a completely different market environment. It was a year of optimism (refer to Callan Periodic Table of Investment Returns). For example:

• Emerging Markets was +37.28%
• Non-U.S. Stocks was +24.21%
• Large U.S. Companies was +21.83%
• Small U.S. Companies was +14.65%

Meanwhile, Cash Equivalent was last place with +0.86%. See how the complete opposite can happen from one year to the next? The stock market can change direction on a whim – that’s why diversification is so important.

Why Is Diversification Important?

Want more stability? Then diversification is key. Investors should remember this fact about diversification – it means you’ll own some losers for periods, but as the market gyrates round and round, the overall return on your investments is more stable than if you try to pick the right “horse” each year.