September 2, 2022
The Bright Side of Recessions
I’ve been called an optimist so I’m usually pretty good at finding bright spots in painful situations. Recessions are painful situations and I like to avoid pain as a general rule, but sometimes some extra pain can be a good thing!
See, I’m doing the optimism thing right now.
Recessions may be painful, but are actually normal cycles in a healthy economy.
Not an Amputation – A Reconstructive Surgery
I’ve been having a lot of shoulder pain over the past few years. I know it’s a natural part of getting older, but it kept getting worse and worse. It hurt too much to pick up my kids and my shoulder was getting weaker. It was getting too uncomfortable to put my arm around my wife in the pew at church. It got so bad that I decided to actually go and see a doctor about it.
It turned out that I had some significant labrum tears that could be repaired with surgery. The doctor told me I didn’t need to have the surgery: if I could live with the pain I wouldn’t have to go through the operation. He also said that if I had the surgery I could be confident the pain would be gone and I’d be able to throw a ball again.
I decided to do it.
It was an outpatient surgery (modern medicine is an amazing common grace!) and I was done and home before supper. I had a nerve block to hide the initial pain, but in a few days that nerve block wore off and the pain in my shoulder was excruciating. It was probably 5 times worse than before the surgery. Every bump or little wrong movement sent shockwaves of agony through my body.
After a month, it was a little better. It still hurt, but not as bad as the first weeks after surgery. I couldn’t use my arm at all though. I had lost complete use of it.
After 2 months my shoulder hurt less than before the surgery. Gradually I was able to use my arm a little more.
After 3 months I could start exercising. I continued to recover until I could actually make a throwing motion without pain until I was good enough to resume my usual excellent frisbee throwing routine with my wife and kids. Eventually I’ll be even better than I was before surgery.
Sometimes I think people tend to fear a recession like they’d fear an amputation. Folks are afraid that a recession will come and then nothing will ever be the same. It’s similar to me thinking I was going to have my arm cut off to alleviate my pain – I’d only get loss and no recovery.
A recession is an economic downturn that causes pain, and there are losses; but there is recovery too.
Every Recession is the Same
We are experiencing a pullback in the stock market – which is not unheard of. A 20% drop from the highs in the S&P 500 happens about every 7 years.
When there’s a 20% drop that’s called a bear market and I have written more about those here.
Usually recessions are preceded by bear markets:
Since 1948, eight of 11 bear markets have been followed by recessions. In one case, the start of the recession came at roughly the same time as the market’s peak; the longest wait was 12 1/2 months.https://www.kiplinger.com/slideshow/investing/t052-s001-8-facts-you-need-to-know-about-bear-markets/index.html#:~:text=Since%201948%2C%20eight%20of%2011,months%2C%20according%20to%20InvesTech%20Research.
I’ve also written about how recessions are officially tracked and declared by the NBER, so we can know what the similarities are between them.
Recessions are preceded by a period of growth. Both the Tech Wreck of 2001 and the Great Recession followed periods of exceptional economic expansion and growth. The 20’s were roaring before the Great Depression too! The recessions of the 70s and 80s were also preceded by some innovative technology or “boom”.
Recessions are correlated with high unemployment. Job loss is common in recessions when companies close down or downsize to reduce inefficiencies.
Wages are usually depressed in recessions, for the same reasons as unemployment.
Every recession has ended at some point. Followed by a period of expansion and growth.
Every Recession is Different
We are always tempted to think: Yeah. Recessions are normal. But this time it’s different. I CAN FEEL IT IN MY BONES. What if this recession doesn’t follow the pattern?
While the next recession will probably rhyme with all the recessions of the past, it won’t be identical.
Banks aren’t structured like they were in 2008 and companies aren’t using mark-to-market accounting any more so it’s unlikely that a recession will see such a huge shakeup and damage in the banking sector this next time. The housing market is totally different now than it was pre-2008. There isn’t an over-abundance of houses and the average home equity in the U.S. is at record highs.
Some recessions are fueled by political instability, war, over regulation, a major failure of an entire market sector, or something else. You’re right if you feel it in your bones. This next time it will be different, but in what ways? Maybe the next recession will be a lot softer than the last one.
How Recessions are Good
- Companies get more efficient
Recessions serve as a forcing mechanism for companies to learn to operate leaner and with more efficiency. This is good for long term profits and values, even though it hurts when it’s happening.
- Personal Priorities shift
Personal savings rates have been steadily declining since the helicopter-money phase of COVID times. A recession can force a priority shift among individuals away from unnecessary risk and consumption toward saving and planning which leads to a much stronger future for them as consumers.
- Waste is exposed
Citizens start to notice extreme government waste when they’re being squeezed and are a lot more likely to “vote with their wallet”. This can result in red-tape cutting in the elimination of heavy-handed regulations and in pro-commerce policies that help alleviate the recession and lead to prosperity.
- Opportunities Abound
Everything goes on sale in a recession. If you’ve been diligent and prepared for the next one it’s a great time to buy. Usually it’s a great time to purchase real estate, start new construction, pay for a remodel, buy a car, or invest in the stock market.
Learn From the Next One
If you’re not feeling prepared for the next recession and things are starting to get real and you’re scared, that’s okay. You can still take action. This next recession won’t be the last one. Take this opportunity to learn and prepare to take advantage of the next recession after it.
If you’re doing well and have saved but are looking for guidance on how to capitalize off of an upcoming recession or want to know if you’re well prepared I’d love to help you.