“Realities of Recessions”
With everything going on we have heard the term “recession” get thrown around a lot over the past couple of months. So, what exactly is a recession and how do we determine if we are in one? Historically, the definition of a recession was two consecutive quarters of decline in real GDP figures. Even though this seems to be a foregone conclusion of occurring in 2020, the definition seems to be changing. The National Bureau of Economic Research, which officially declares recessions now defines it as a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. Regardless of the definition, there are some historical facts that can be helpful to know about recessions and how we normally come out of them.
Recessions tend to be short, and Expansions Powerful
Let’s start with some very good news….recessions tend to be painful but relatively short lived. On the other hand, expansions tend to last 6 times longer than recessions and create significantly more jobs. Since 1950 recessions have ranged anywhere from 8 to 18 months with the average being somewhere around 11 months. For people who have lost their jobs or have seen their investment accounts nosedive, that 11 months can feel like an eternity. While we can’t minimize that feeling, it is also important to note that investors with a long-term outlook tend to stay the course and participate in the aggressive growth that follows.
The Consumer Leads the Way
Individuals like you and me are what tend to lead the way out of difficult economic times. In the U.S., the consumer accounts for approximately two thirds of the overall economy. With millions of Americans already on unemployment and seemingly millions more joining them every week, it is easy to understand why purchasing activity has dropped off. While government support and stimulus is trying to curb this issue, low employment is likely to keep consumers in a frugal state of mind. On the other hand, once individuals start to spend more freely it has historically been the catalyst that leads the way out of recessions.
Timing may not be Everything
For individuals lucky enough to have cash reserves or even the stomach to jump back into the market, waiting for the “all-clear” can lead to missing out on gains. Since World War II, in recessions that have a corresponding equity correction, the S&P 500 has bottomed 3 months before the end of each recessionary period. Certainly, the month of April has been an interesting phenomenon that further proves this point. During March, the S&P 500 lost -12.35% and then gained +12.82% in April. Will the market keep going higher from here, or crash again? The reality is that nobody actually knows. Since we don’t know the timing of this, buying back into the market over time tends to provider lower risk with consistent returns.
Almost a year ago, we put out a post titled, “Consistency is Attractive.” With everything going on right now, we felt it was a timely reminder that being consistent, not only with our finances, can be a great source of strength in times of turbulence. We hope you find the sentiments shared last Summer to be just as relevant today!
In the age of social media, it’s so easy to get caught up in what the latest trends are and then jump around to ensure your life is oriented towards those trends. Older generations can claim that it is a “millennial” issue but keeping up with the Joneses has been around for decades (if not centuries), it’s just more easily accessible these days. The truth is, whether we are talking about relationships, jobs, or our finances, the idea of consistency may seem boring but is extremely attractive in the long run. If it’s relationships, maybe consistency is continuing to show up and be available for conversations of friends and loved ones. For work, maybe consistency looks like showing up on time every day, doing your job diligently, and bringing laughter into your workplace. For finances, consistency can be many different things, but we will explore a few of them this week.
We’ve all heard it – “If you save XX amount of dollars each month for the next 40 years you will be a bazillionaire” (technical term). It’s fun to know how much money consistent savings could provide for your future, but it isn’t easy to put it into practice month in and month out. The people that tend to do this the best are those who have figured out how to automate their savings through direct debits on their accounts. If savings are not automated, then missing a couple months out of the year is very likely and can have large long term affects. Example: Someone saving $500 per month at a 7% return for 30 years would have just over $600,000. If that same person missed saving that $500 per month for 2 months each year (just from lack of focus), the end result is just over $500,000 or a $100,000 difference!
Saving motivates some and is extremely boring to others. That is why it’s important to find ways to make your money work for others. Maybe it’s a random act of kindness to pay for the person behind you in the drive thru, or maybe it’s donating to a cause that you are passionate about but finding ways to help others with your money is very rewarding. Plus, setting up your charitable giving in the right way can have tax benefits as well!
Admittedly, this is not one that comes naturally to me! However, on each of our financial journey’s it’s important to take a step back every once in awhile and celebrate little successes along the way. Just like a food diet might encourage a “cheat meal” every now and then, it’s important to celebrate with our finances too. These celebrations don’t always have to be huge amounts of money either. Find something that is fun for you and build it into your financial journey on a consistent basis!
Consistency is one of our 3 pillars at Van Gelder Financial. If you, or someone you know, is looking to gain control and consistency with their finances, then reach out and speak with one of our advisors today!
April 17th, 2020