A Recession, in understandable terms, is a period of continued negative economic activity. This is a period where people have less cash to spend. Traditionally a Recession is called when there are two consecutive quarters of negative growth in the economy. The National Bureau of Economic Research (NBER) is the governmental body that officially declares a Recession.
When times are good people spend money. They expect, and often get, pay increases. Everything is going smoothly. The most common indicator of the US economy is what’s known as the Gross Domestic Product also known as the GDP. This indicator measures the economic value created by every industry and job throughout the country. All Labor and value are added together providing a guide on the overall output throughout the US. When the economy is growing it will be apparent due to the increase in demand for goods and services.
Throughout history there have been a multitude of recessions and they all eventually dissipate. The challenge is of course, how long they last and the severity of them. The most recent recession happened in May 2020, lasting only two months and was caused due to the worldwide pandemic. Any major shock to a world-wide economy is unusual but they do happen. WW1 and WW2 are examples. The Dot-Com Bubble as well as 9/11, both occurring in 2001 as well as the mortgage and market crisis of 2008 are some of the most recent truly severe recessions.
Bringing the results of a recession closer to home, let’s use an everyday example:
When the economy is moving along the main household earner may get periodic pay raises. The second household earner works part time. With money coming in they are comfortable and can afford some of the nicer things. Deciding that a new car is needed they spend a bit more than they might normally. The car company’s receiving more from our couple which increases their bottom-line. In turn the GDP increases as well.
During a recession the main earner may not see a salary increase, hearing the excuse “Things are tuff all over!” Additionally, they may fear being laid off! The second earner losses their job due to the economic downturn. The washer and dryer they planned on purchasing is now put on indefinite hold, so the manufacturer is not seeing any money from the household. No value being added to the manufacturer and consequently no value to the GDP. This is repeated through every sector of the economy. When things are going great, we spend. When things aren’t, we don’t.
Recessions cause many challenges – job security, especially in some of the most vulnerable industries. Hiring freezes and layoffs are common as well. Money is not circulating as frequently in the economy and this in itself can cause a ‘ripple effect’ on a host of sectors. Along with the disappointment of not being able to make purchases, many people see the negative effects on their investment portfolios. Watching a 401K, 403B or any type of retirement or investment account take a nose dive can be nauseating.
There are some ways for people to offset, to a degree, the loss of investment dollars and that is done by ‘hedging.’ By investing in what are known as ‘Safe Havens’ help mitigate the pain of losing money. Investing in assets such as precious metals – gold, silver, platinum and palladium – tend to rally off of bad news.
Large Cap investing is also an alternative.
In your retirement portfolio there likely will be a subaccount that is made up of some of the largest companies in the United States. These are what are known as “Large Cap” companies. Companies such as these tend to outperform smaller companies, known conversely as “Small Cap” companies. Chances are your retirement portfolio has a Small Cap subaccount available as well.
Don’t expect Large Caps to bring large returns at this point but traditionally they are more stable due to their more diversified income streams, more stabilized costs and are not as dependent on a constant flow of new purchasers. Although the returns may not be large, if at all during this period, they often decline less than other investments helping to minimize any loss of money.
The positive news here is this: when the economic indicators begin to point to a buying opportunity, the stocks and mutual funds that were trading at a higher level – perhaps much higher level – could now be purchased for a much lower cost.
GaneWisdom/Market Edge watches each sector of the economy and the many indicators of it as well. Basing our analysis on all of this information allows us to form our commentary and appraisals.
