Investors Column – Recessions and You

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March 21, 2022 by Scott Crosby - Views: 51

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Investors Column – Recessions and You

A recession is a “downturn”, “market correction”, or a “bear market” of significant magnitude and duration.  All of these terms refer to a situation where most companies (and thus their stock price) are expected to significantly drop in value.

S278-1.jpgThe stock market has its normal ups and downs just as a matter of doing business. Each stock’s price rises and falls due to that company’s reporting of its sales, income, profitability, etc.  Each of these values can affect a company’s stock price.  

Indexes like the S&P 500, the Dow Jones Industrial Average (DJIA, or “the Dow”), and Nasdaq are simply the composite sums of certain groupings of stocks.  Ideally, as each company increases its business, the indexes show a steady, gradual improvement of shareholder value over time.  

Localized downturns are usually short-lived, and recovery occurs in weeks or in a year or so.   Governments, however, are by far the most destructive source of disruption of individuals’ efforts to make a living and prosper.  The economy is only the composite sum of all those efforts.  

External (national or world) events can affect the perceived value of many companies.  That results in a substantial change to all the indexes.  Major downturns are virtually always due to external events such as war, changes in government regulations, increases in taxes, etc.  

Government disruption is inevitably harmful to prosperity.  That is why “That government governs best which governs least.”  Taxes to support national defense, etc., are necessary to protect citizens’ prosperity; unfortunately, taxes do take away some money that could otherwise be invested in improvements – to their businesses, to their homes, and to their lives.  But taxes beyond those simple government services have no compensating value.  The more taxes are increased, the more the inevitable damage to the prosperity of the people the government is supposed to serve.

To put it another way, government interference in the economy produces the most serious, worst, and longest recessions.  

America’s worst recession, the Great Depression of 1929, is a prime example.  The Roaring Twenties were the result of the increased economic freedoms under Presidents Harding and Coolidge.  But President Hoover introduced huge tariffs, sending America’s exports plunging and setting the stage for World War II.  He was voted out in 1932, but President Roosevelt’s explicitly-socialist policies and hatred for private businesses – private investments and efforts – destroyed any possibility of recovery.  It was only with the changes brought by Presidents Truman and Eisenhower after the war, that recovery became possible.  It took twenty-five years – from 1929 to 1954 – for the economy to return to the same level it had been in 1929.  

Without government intervention, recessions still do occur.  But they are typically isolated to a single industry, or to a single region.  Isolated circumstances do not spread elsewhere.  Recovery is quick – days, months, or a year or two at most.

Shown here are two charts that illustrate historic downturns of more than 10 percent.

Chart A
Chart B

Chart A shows the severity of downturns since 1974.  Only five “market corrections” have been severe enough to be termed a “bear market”; i.e., experienced a downturn of more than 20 percent.

Chart B compares the size and durations of Bear Markets and Bull Markets since 1966.

As the charts show, bull markets tend to be of longer duration and greater percentage change than bear markets.  That reflects the general reality of life in the United States:  prosperity generally increases over time; improvements in lifestyle are generally the rule.  Bad times are the exception.  People, given the freedom and opportunity, will generally work to improve their lives.  

Wars, socialistic or tyrannical government actions, tax increases and other impediments are detrimental; i.e., destructive.  

Some Presidents and some Congresses clearly do not understand this issue, or deliberately disregard it.  When they do, your investments and your prosperity (whether you own stocks or not) are impacted for the worse.■


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