When the Next Recession Happens, Watch for these 4 Positive Economic Opportunities
Recently Ben Carlson wrote an interesting article on Fortune about some of his predictions of what could happen when the next recession hits the US economy. He claimed, “unless the GDP suddenly falls off a cliff, next month will mark the longest economic expansion in U.S. history, surpassing the period from March 1991 to March 2001.” This image chart below explains it more.
Image credit: Fortune
According to Investopedia, an “economic cycle” or sometimes referred to as a business cycle- is the natural fluctuation of the economy between periods of expansion (growth) and contraction (recession). Metrics such as gross domestic product (GDP), interest rates, levels of employment and consumer spending may help economists try to gauge where we are in the economic cycle. Periods of growth and economic expansion do not go on forever and eventually excesses will build in the market which will in turn trigger another economic contraction or recession. Now no one has an exact crystal ball on when it will happen, it may be next year or in 2021, but what is for certain is that recessions are a cyclical component of the economy. Business Insider author Daniel Strauss recently reported about the so-called yield curve – “which tracks the spreads between short- and long-dated Treasury bonds – invert for the first time since 2007. The most recent inversion added to existing concerns of an economic slowdown as the occurrence has preceded every recession since 1950.”
So What Exactly is a Recession
A recession is defined as a period of a significant economic downturn that lasts longer than two consecutive quarters. The U.S. economy is no stranger to recessions, having experienced an estimated 47 of them since 1790. When recessions kick in and the economy slows down a lot of negative things can happen; such as the unemployment rate increases and people lose their jobs, business cut back on spending or workforce, people start to spend less, asset prices go down and the mood of the country can bring on anxiety or cautiousness. So recessions are never a great thing to experience but there are several silver linings to an economic downturn in the market. And, if you prepare yourself (both psychologically and financially) before the next recession happens, you can then take advantage of certain things.
Stocks and asset prices go down
If we analyze the last dozen recessions going back to the WWll era, as Ben Carlson points out, “the average corresponding drawdown in the S&P 500 was close to -29%.” The chart below explains more.
Image credit: Fortune
Now, stock market sell-offs do not always match with the time periods of when recessions begin and end. But typically when there is a recession the price of stocks gets cheaper, which can be a good time to buy certain kinds. And Ben also points out that the only recession that did come with a double-digit downturn was one that came right after the second world war ended. He mentions that ⅔’s of the time, stocks take more than a 20% decline. Now this may not be such good news if you already have a large portfolio invested in the market. “But if you are an investor that is still in the buying stage of your investor cycle, then bear markets and recessions enable a lower entry point to purchase stocks, often at higher yield” says Mr. Carlson. He also points out an example “when the market peaked in late-2007, the S&P 500 dividend yield was roughly 1.7%. That shot up to 4% by the time the selling subsided in early-2009, offering investors not only a half-off sale on the price of the market but a more than doubling of the dividend yield.” Younger investors in their 30’s should welcome recessionary bear markets, as a stock acquiring opportunity to deploy capital into the market.
Mortgage rates tend to go down
Image credit: Fortune
While dividend yields on stocks tend to rise during an economic contraction, interest rates tend to fall as economic growth slows, the Fed lowers short-term rates, and bond prices rise. Over the past five recessions, mortgage rates have fallen an average of 1.8 percentage points from the peak seen during the recession to the trough. And in many cases, they continued to fall after the fact as it takes some time to turn things around even when the recession is technically over.
Mortgage rates don’t have nearly as far to fall as they did in the past since the starting point is so much lower today. But even a little weakness in economic activity can send rates plunging.
After hitting 5% or so in November 2018, the 30 year fixed rate mortgage has fallen to around 3.8% with a minor softening of the economy.
For those who can take advantage, a recession could be a nice time to buy through a combination of lower housing prices and lower borrowing costs.
New business opportunities
Recessions are not all bad, it can create new business idea opportunities. According to Darren Dahl a Huffpost contributor’s article “Top Companies Started During A Recession” some of the most famous Fortune 500 listed corporations around got started in those hard bear market economic times that the government defines as “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real gross domestic product (GDP), real income, employment, industrial production, and wholesale-retail sales.”
General Electric was founded in 1893 just threes years after United Kingdom’s panic of 1890, Ben Carlson points out that IBM was founded following a terrible three-plus year panic in the late-1800s. And UPS was started in during 1907 Bankers’ Panic crisis. The American car company General Motors emerged just a year later. The powerhouse media company Walt Disney was born during the brutal 1920s financial crisis. Ben also mentions that media publisher Fortune Magazine “was created just 90 days after the market crash of 1929.” During the rough recession period of 1973-1974, gave way to Microsoft and Charles Schwab both were born. Ted Turner’s vision for Cable News Network (CNN) a 24-hour news coverage was founded during the 1980 “double dip” recession. The unicorn VC powerhouse startup Airbnb was born out amidst the financial housing crisis of 2008. Wework the coworking giant was founded in 2010 just a few years later. The 2009 Kauffman Foundation study titled “The Economic Future Just Happened” found that “recessions and bear markets, while they bring pain and often lead to short-term declines in business formation, do not appear to have a significantly negative impact on the formation and survival of new businesses.” The bottom line is recession can spur creative and interesting business ideas.