Recessions Happen, What do I do Now?

This global pandemic has one question on a lot of people’s minds: how often do recessions happen? Since the Great Depression ended in the late 1930s, the U.S. economy has experienced a recession about every four years.

Because the last recession ended in 2009, people have been chattering for years about the country being well overdue for another. But even though history can help us recognize overall patterns in the economy, no one can predict exactly when recessions will happen or how long they will last. Bottom line? Recessions are simply an inevitable part of the economic cycle, and their frequency and duration vary.

Recession Definition

Before we go much further, let’s first define what exactly the word “recession” means. A recession is officially defined as two or more consecutive quarters of negative economic growth. So in theory, a recession could last as little as six months—or it could go on for years, as with the Great Depression and the Great Recession of 2007-2009.

Are We Overdue for a Recession?

As mentioned earlier, financial modeling is influenced by previous events. As history has shown us, recessions usually occur about every 4-5 years. Fortunately,  history can also tell us a lot about economic expansions, too!

Here are the facts: The average economic expansion in the U.S. usually lasts about 39 months, followed by a recession that lasts an average of 11 months. But the most recent expansion lasted from 2009 to February 2020, for a total of 127 months—the longest expansion in our country’s history. Clearly, the economy isn’t worried about following anyone’s watch.

The Benefits of a Recession

There’s no doubt about it; recessions can cause a lot of problems. People fear them for good reason. They often lead to higher rates of unemployment and the sinking value of assets. But the good news is that recessions have always improved, and they actually come along with some benefits. Yes–we really did say benefits!

The silver lining of recessions is they can help get rid of excess, balance economic growth, expand buying opportunities, and change the consumer mindset. Though it may be hard to accept, recessions aren’t 100% bad.

So Why Do Recessions Happen?

Though recessions don’t really happen because we’re “overdue” for one, it’s natural to think that a recession is more likely to happen the longer an economic expansion goes on.

In fact, in some ways, a recession is a self-fulfilling prophecy: The more Americans and their employers worry about the chance of a recession, the more likely it is to happen. Because when people are worried about a recession, they may sell their stocks, take money out of banks, spend less disposable income, and other behaviors that cause the economy to crumble.

The recession of 2007-2009 occurred in part because of a housing bubble, bad lending practices, and corporate greed. Other recessions have occurred because of the economic cycle, asset bubbles, and economic shocks. When the business environment changes rapidly and uncertainty sets in, companies must scramble to reallocate resources and limit production—and those actions can lead to a recession.

How Long Do Recessions Last?

As we mentioned before, it’s impossible to predict exactly when a recession will happen and how long it will last, but we can look to the past to make an informed estimate. Since the end of World War II, the average recession lasted an average of 11 months but could range from 6 to 16 months, or longer.

However, there are certainly exceptions to the rule. Our country’s most recent recession lasted longer than the historic average, dragging on from 2007 to 2009—a full 18 months. The Great Depression of 1929 to 1933 spanned more than twice as long, causing an economic depression that lasted for 10 years.

Difference Between a Downturn & a Recession

Sometimes we hear the terms “downturn” and “recession” used interchangeably, but in reality, they define two different states of the economy.

Downturn Definition

A downturn can happen any time major market indexes like the S&P 500 or Dow Jones Industrial Average drop. But a market drop doesn’t always mean economic activity has declined—a downturn might occur because news or politics cause fear and worry in the market. Once the bad news blows over, the value of the index may go back up quickly. 

When more serious downturns happen and indexes drop more than 20 percent, this is known as a bear market. This type of downturn could be caused by changing interest rates or other factors, and it can take longer to bounce back from.

Recession Definition

A recession happens when the economy has at least two consecutive quarters of negative growth. Though index values usually do go down during a recession, they aren’t the main factor in determining whether or not the economy is in a recession. It’s even possible to have index values going up while in the midst of a recession since the stock market is forward-looking and economic data is backward-looking.

Can a Downturn Cause a Recession?

Market downturns don’t always mean that there will be a recession, but some do. In these situations, the market downturn leads to a shortage of capital, which forces companies to lay off workers. Those workers have less money to spend or invest (i.e. restricting purchases to the necessities!), which in turn contributes to a possible recession.

What Industries Thrive During Recessions and Why

We already discussed some of the benefits of a recession. Here’s another silver lining: Even when economic growth is shrinking, some industries are still likely to thrive. It makes sense, if you think about. Recessions change consumer behavior, so there are naturally some industries that get an uptick when people are worried about money or trying to save.

Only time can tell which industries will thrive in any given recession, but we can make predictions based on the last recession.

In 2008, only a handful of stocks in the S&P 500 came out with positive returns. Some of those stocks included Dollar Tree, Vertex Pharmaceuticals, H&R Block, Walmart, and Ross Stores Inc. Most of the stocks on the list were discount stores or healthcare-related.

What Does the Government Do to Help During a Recession?

The government always steps in to lessen the blow of a recession, either by creating stimulus packages, sending checks to Americans, cutting payroll taxes, or creating government jobs. This is all known as fiscal stimulus. 

They also can coordinate policy with the Federal Reserve (the Fed), a central bank that was set up to keep unemployment rates low and stabilize prices.

There are many things the Fed can do to help the economy, such as lowering interest rates and capital requirements. The Fed can also create new money and use it to purchase securities such as government bonds, which slows deflation and lowers interest rates. Each of these actions fall under what is known as monetary policy, or monetary stimulus.

How a Recession Affects My Stocks

When the country is in the middle of a recession, stockholders get worried. But it’s important to remember that stock market performance is not the same thing as the economy. Stocks can gain positive returns during a recession, so it’s best to play it cool when the economy starts to look dicey. Instead, here’s what you should do! Use this as an opportunity to take advantage of a sale and follow the 3 “O”s of market uncertainty:

  1. Own your Emotions: You (should) have a long-term strategy in place. Stick with it. Whether you’re nearing retirement, or have years to go, you likely don’t need to be accessing all this money today.
  2. Obey your strategy: It’s not a loss until you sell. You’re at a fork in the road–you can sell and trigger a loss, or hold on and ride it out to recovery. 
  3. Operate like an expert: Facts: stick to ‘em. As history suggests, this too shall pass. 100% of past market declines have been followed by a full recovery and eventually new highs.

Diversify Your Portfolio

A recession is also a great opportunity to re-evaluate your portfolio and make sure it’s diverse enough to survive and thrive. If you’re decades away from retirement, your portfolio should be more heavily invested in stocks. Though there will be dips in the market, remember that you’re not actually losing any money unless you sell, and all market declines throughout history have only been temporary.

If you’re nearing retirement, you should have enough bond and cash exposure in your portfolio to help preserve the income portion of your account even in the midst of a recession. Think of your portfolio as one bucket for growth (stocks), and one for income and preservation (bonds and cash).

Do Recessions Always Turn Around?

Recessions have always turned around, since the beginning of U.S. history. The average recession lasts about four years, so try to be patient and focus on sticking to your strategy. Deep breaths!

Wondering If You’re Properly Invested for a Recession?

We’ve covered all the basics of recessions: We can’t predict exactly when they’ll happen, but we do know it’s not a matter of IF, but WHEN the next one will occur. 

They’re an inevitable part of the economic cycle, and smart investors are also prepared for when they happen. So don’t run from a good sale when you see one, and stay focused on your long-term investments. Sign up for Blooom today to stay prepared and afloat during a recession. Sticking to time-tested methods, we use a savvy market philosophy to ensure you’re making the most of your IRA or 401k. We’ve got your back!

Disclaimer: The information is provided for discussion purposes only and should not be considered as advice for your investments. Investing involves risk. Your investments are subject to loss of principal and are not guaranteed.

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