Recession A Good Time to Start or Expand Your Business | Part 1

Recession | A Good Time to Start or Expand Your Business? | Part 1

“Big opportunities come infrequently.  When it’s raining gold, reach for a bucket, not a thimble.”

| Warren Buffett, 2009 letter to shareholders of Berkshire Hathaway, page 15, paragraph 1.

This was one of Buffet’s statements during the 2000s Great Recession and it’s worth thinking about as well as looking at the numbers from this particularly significant recession and others during the last 150 years to determine if now is a once-in-a-generation time to start or expand your organization.

In addition to the numbers, is the business psychology right for a growth strategy?

Specifically | Are other organizations sitting around doing nothing?

The W Trend | Recession Stock Market vs. Unemployment

Note | S&P vs. Dow

While many people and organizations claim that a recession started and ended on a specific day due to a specific reason or metric, there’s a number of ways to determine a starting and ending point.

For this analysis, we’re more interested in trends than specific dates.  And we prefer data that, although not perfect, can at least be verified and it’s underlying assumptions understood.

That’s why we’re using the S&P 500 (Standard & Poors) market index instead of the Dow Jones 30 (Dow Jones Industrial Average).  Its intrinsic breadth, compared to the Dow, helps show a clearer picture of what’s going on in public companies as well as the psychology of people and institutions who purchase, sell, and short stocks.

The S&P was started in 1926 tracking 90 stocks and expanded to covering 500 stocks in 1957.  Because the coverage was only 90 stocks during the Great Depression, we’re not reproducing that particular dataset in this article.  In general, the S&P during the Great Depression does indicate the same “W” trend that we find in later recessions.

Note | Unemployment

Unemployment data for this article is from the U.S. Bureau of Labor Statistics (BLS) and is available back to 1948.  This is another reason why we’re not covering the Great Depression.  There are all types of issues with the assumptions about who the BLS considers to be an unemployed person, but this is the best publically verifiable information available.

Ask A Strategist | Recession Stock Market vs. Unemployment

 

The W Trend is the name we’ve given to major recessions because the “shape” of both the S&P stock index and the unemployment data forms a “W.”  Depending on where you define the starting and ending points of a severe recession, you may see two “V” shaped curves instead of a single “W.”

Recession | 1972 Inflation/Vietnam/Watergate

S&P 500 stock market

  • Start date  |  1972 December
    • Valley 1  |  -46% during 1974 September (Duration from start:  1 year and 9 months)
    • Valley 2  | -26% during 1978 February (Duration from start:  5 years and 3 months)
  • End date  |  1980 July (Duration from start:  7 years and 8 months)

 

Unemployment

  • Start date  |  -5% during 1972 December
    • Valley 1  |  -9 % during 1975 May (Duration from start:  2 years and 6 months)
      • Lagged the stock market by 8 months
    • Valley 2  |  -10% during 1982 November (Duration from start:  10 years)
      • Lagged the stock market by 4 years and 9 months
  • End date  |  -5% during 1989 February (Duration from start:  16 years and 3 months)
    • Lagged the stock market recovery by 8 years and 7 months

 

Recession | 2000s Dot Com/Housing Bubble

S&P 500 stock market

  • Start date  |  2000 August
    • Valley 1  |  -46% during 2002 September (Duration from start:  2 years and 2 months)
    • Valley 2  | -52% during 2009 February (Duration from start:  8 years and 7 months)
  • End date  |  2013 March (Duration from start:  12 years and 8 months)

 

Unemployment

  • Start date  |  -4% during 2000 August
    • Valley 1  |  -6% during 2003 June (Duration from start:  2 years 11 months)
      • Lagged the stock market by 9 months
    • Valley 2  |  -10% during 2009 October (Duration from start:  9 years and 3 months)
      • Lagged the stock market by 8 months
  • End date  |  -4% during 2017 October (Duration from start:  17 years and 3 months)
    • Lagged the stock market recovery by 4 years and 7 months)

 

Key takeaways about a W Trend recession |

  1. The two recessions illustrated here lasted between 7 and 12 years from a stock market perspective.
  2. From an unemployment perspective, these recessions lasted much longer | Over 15 years.
  3. While maximum unemployment generally lags the maximum S&P 500 downturns by less than a year, unemployment has a significantly longer recovery cycle (long-tail) than the S&P 500.
  4. From a stock market perspective, just as the Great Depression can be illustrated as two back-to-back recessions, the illustrated recessions can also be described as two “V” shaped recessions.

COVID-19 Recession

In all likelihood, we’ve entered into a recession of which the severity is unknown.

Question |

Will this recession be significant to the point where it will likely follow a W Trend?

While we currently have only 4 months of unemployment information (2019 December to 2020 April) and 5 months of stock index information (2019 December to 2020 May), the initial trend is similar to the 2 illustrated recessions.

Caveat |

Four months of data is early to be predicting much of anything for either the stock markets or unemployment.

Moving Forward

Although there are many organizations predicting what could happen 1, 2, or even 5 years from now, our approach is to |

  1. Outline 3 scenarios based on information from scientific, medical, financial, and business organizations along with our own research and polling information.
  2. Develop 3 strategies (likely, good case, worse case).
  3. Select a primary strategy of the 3 to begin executing while having shadow teams in place who continue to develop operational plans for the other 2 strategies.

Bottom Line

If the COVID-19 recession starts looking like a W Trend, there’s no need to rush into executing on one of the strategies because a recession of this nature will last for many years.  But, there is a need to plan multiple strategies for it today.

Next Steps

We’ll look at businesses that started during the two recessions illustrated in this article as well as the Great Depression to examine how they started, issues that they encountered during their recession years, and how they’re performing today.

All of this in the name of answering the key question posed in this article |

Is it a good time to start or expand your business?

 

 

Photography by Riccardo Annandale

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