Origins of Economic Downturns: Initiating Points and Warning Signals

December 7, 2023

As financial advisors assisting individuals in managing their finances, it is our duty to address not only prosperous periods but also the more challenging phases. Amid discussions about economic downturns, the term “recession” frequently emerges, an aspect we may prefer to avoid contemplating but one that we inevitably experience. As our economy appears to transition into a bear market, it becomes crucial to explore indicators signaling the onset of a recession and the preceding factors.

A recession is characterized by an economic decline marked by increased unemployment, a decline in the stock market, and a dip in the housing market. Since 1854, the United States has weathered 33 recessions, and observing diminishing stock market indices, housing prices, and GDP (gross domestic product) collectively signifies the advent of a recession.

GDP Decline:

Technically, a recession manifests as two consecutive quarters (six months) of GDP decline, serving as one of the earliest indicators. GDP represents the output within the United States, and a sustained decline for two quarters signifies a recessionary phase.

Corporate Cutbacks:

A second observable trend is companies scaling back their operations. Business leaders and CEOs exhibit a reluctance to hire extensively, leading to a deceleration in hiring and business development. Capital investments for future projects may also witness a reduction.

Employer Layoffs:

The third discernible sign is corporate cutbacks or layoffs. A significant marker that draws attention to a recession is when individuals within one’s social circle experience job losses. The surge in unemployment numbers during 2020 underscored the tangible impact of a recession when acquaintances reported being furloughed or laid off.

Increase in Government Debt:

Subsequently, the focus shifts to government debt, which tends to rise during a recession. In response, the Federal Reserve often reduces interest rates. Lowering interest rates empowers consumers to avoid higher interest payments, essentially serving as a stimulus measure to reinvigorate the economy.

Stock Market Volatility:

Finally, the depreciation of stocks becomes evident during a recession. As homes lose value, various assets experience a decline in worth, contributing to stock market volatility.

Understanding Recessions:

It is imperative to recognize two key aspects about recessions. Firstly, having navigated through 33 recessions in the past, it is likely that we will encounter them again in the future. The business environment undergoes contractions periodically, and while market downturns may induce panic, it is crucial to remember that recessions are part of the economic cycle and not indicative of the world ending.

During recessions, engaging in an honest assessment of our investments and assets is essential. Evaluating their performance and determining whether they align with our financial goals over the next six months to ten years becomes pivotal. Questions regarding asset volatility and the presence of stable consumer staples in one’s portfolio should be addressed.

Rather than succumbing to fear during recessions, maintaining composure and confidence is paramount. Recessions are transient challenges that can be navigated successfully. For those seeking a second opinion on their portfolio, we invite you to contact us and schedule an appointment. We are here to assist you through both prosperous and challenging financial times.