Behind the Scary Words

By Zach Bass

When was the last time you heard about the term ‘recession?’ How about ‘market crash?’ Often, folks think of these as one and the same, and understandably so. These are posted all over the news. They can make you feel like you’re at your favorite amusement park, and you know that big drop is feet ahead. While both can cause fear and anxiety, understanding the difference between the two is crucial for making informed decisions and helping you sleep at night.

The good news is that, not only do these two terms not always go hand-in-hand, sometimes they can be exact opposites. That won’t have us glued to the news, though. It won’t make us feel like all of our hard-earned money is going to be gone tomorrow. And over the last decade, as Google has become a verb, more people fear losing money — or losing it all — than they fear death.

Zach Bass

“A dip is a small decline in the market. We normally experience these three to four times a year, where the market will fall roughly 5% from its most recent high. However, they are generally short-lived, lasting only a few days or weeks.”

What Is a Recession?

A recession is a decline in economic activity spread across the economy for two quarters in a row (six months). It is characterized by a decrease in real gross domestic product, rising unemployment, and reduced consumer spending. These events typically also last longer than market declines. The most important thing you should take away from this is that you cannot calculate if a country or economy is in a recession until six months after key events have already unfolded. This is like looking in your rear-view mirror.

What Is a Market Crash?

This is an interesting question because everyone has their own definition of a crash. However, there are three terms that we refer to in the financial industry: a dip, a correction, and a bear market. Now, these are normal activities, and if viewed correctly, could actually be positive. However, I would like to take a moment to tell you about the historic bear and bull symbols of Wall Street. They were chosen for the way these strong animals attack. The bull will thrust its horns up, while the bear swipes its paw down.

How are the three terms different?

• A dip is a small decline in the market. We normally experience these three to four times a year, where the market will fall roughly 5% from its most recent high. However, they are generally short-lived, lasting only a few days or weeks.

• A correction is 10% off the most recent high and occurs roughly every two years, generally lasting around four months on average.

• A bear market is a drop of 20% or more. These are much harder to determine the length and severity. I believe we all remember that thing called COVID? As the world shut down in March 2020, the market fell more than 30%. In July of that same year, we had returned to the previous all-time high.

Here is how rarely these events occur. Since Black Monday in 1987, when the U.S. stock market fell roughly 20% in one day, we have only seen four of these events:

• 2000-02: Y2K had passed, the dot-com bubble burst, 9/11 tossed us into a full-blown recession, and 2002 was the worst of the three years.

• 2007-09: Subprime mortgage and banking crisis.

• 2020: We have already discussed the arrival of COVID.

• 2022: A brief bear market driven by rising interest rates to combat inflation.

The stock market is driven by expectations. It is the front window to your car. When a company or an economy act as expected, everything is fine. When you do not meet your expectations, you are disciplined. When a company is disciplined, its stock price goes down.

Conclusion

I promised a for how you can benefit from these types of events. I want to remind you of the term ‘buy low, sell high.’ The financial markets are the only ‘store’ where, when there is a ‘sale’ sign, people run away. Yet, every year, people stampede into Black Friday sales. If gas was a $1 a gallon, the lines would be crazy. But in the markets, when everyone is panicking, it might be the right time to say, what should I be buying?

It is always a great idea to periodically review what you actually own and make sure you’re comfortable with it. Some folks love having a financial or investment advisor as a partner, while some love to do research and make all the decisions themselves. Having the appropriate amount of cash on the side, and a plan for when these events occur, is so important.

Zach Bass is a chartered retirement planning counselor (CRPC), a fee-only financial advisor and fiduciary. Securities offered through Osaic Wealth Inc., member FINRA/SIPC. Osaic Wealth is separately owned, and other entities and/or marketing names, products, or services referenced here are independent of Osaic Wealth. Wealth Management Resource Group is independently owned and operated.