When the economy craters, it creates new opportunities for budding business owners to solve new ... [+]
The United States may be better off than you think. Currently, the big concern and preoccupation for people is whether or not the U.S. will be heading into a recession. It's the big boogeyman hiding in the closet that people are all supposed to be afraid of.
Of course, it's not pleasant when the economy contracts and people lose their jobs, savings and investments. However, you can’t simply look at the job market, economy and financial markets in a snapshot picture. There are ebbs and flows over time. Short term, the situation may look bleak. Looking over the horizon, everything could turn around, as history has proven.
Recessions Create Opportunities
Many well-known, fabulously successful companies were started during recessions and economic downturns. Recessions, stock market plunges and periods of high unemployment occur relatively regularly. It's baked into the system. The U.S. economy swings like a pendulum in boom and bust cycles. For context, if you are a Baby Boomer, you have lived through nearly a dozen recessions.
Now-Famous Companies That Started Out In A Recession
- Hewlett-Packard (1937-1938 Recession)
- Hyatt Hotels (1957-1958 Recession)
- Microsoft (1973-1975 Recession)
- Electronic Arts (1981-1982 Recession)
- Mailchimp (2001 & 2009 Recession)
- Uber (2007-2009 Recession)
- Airbnb (2007-2009 Recession)
- Slack (2007-2009 Recession)
- Warby Parker (2007-2009 Recession)
- Venmo (2007-2009 Recession)
Why Are Businesses Started During Downturns?
During a downturn, people lose their jobs. With a lack of available options, a laid-off worker who harbored dreams of being an entrepreneur now doesn’t have any excuses to wait any longer. There is a feeling of, “It’s so bad that it can’t get any worse, so I might as well take the shot.”
As other people are downsized, you may be able to recruit talent for your emerging enterprise. When the economy craters, it creates new opportunities for budding business owners to solve new problems.
Stock Market Crashes And How Long It Takes To Recover
In 1929, the stock market crashed and the U.S. entered into the Great Depression. Without the public assistance Americans have access to now, families were left helpless. Wall Street professionals who lost their life savings had to panhandle for food. The stock market kept falling for a few more years and hit rock bottom in 1932. The market tumbled more than 80% lower than its all-time highs. It took over 20 years to recover.
In 1987, the “Black Monday” October crash happened. Similar to present-day events, a long bull-market run that kept the stock market moving higher without any corrections to cool it off ended badly, plummeting 22.6%. It took roughly two years to make a comeback.
In the late 1990s into 2000, the U.S. endured the dot-com boom and bust. Speculation in the newly emerging tech sector reached a fever pitch. Stocks were priced at ridiculously high levels based on the euphoria that these new tech darlings would change the world overnight.
Instead of valuing companies based on traditional price-to-earnings metrics, Wall Street research analysts pointed to the number of clicks a website received as evidence that the tech company was a terrific buy. However, the bubble ultimately burst in March 2000. The S&P 500, a benchmark used to gain an overall perspective of the financial markets, cratered—free falling more than 50% from its highs. It took about seven years to recover.
Shortly after the dot-com burst, there was another bubble emerging. In 2008, banks made reckless loans that enabled people to purchase homes that they couldn't afford, if the economy cooled down. The U.S. had a housing bubble that lead to a subprime mortgage crisis. Sure enough, when the adjustable interest rates kicked in, families couldn't make the higher monthly mortgage payments. Many lost their homes. The S&P 500 lost nearly half of its value. Around two years later, the market climbed back.
At the onset of the Covid-19, the stock market plunged more than 30% in February to March 2020. In this case, due to interventions by the U.S. federal government and Federal Bank actions, it only took about six months to climb back up again.
After all the gyrations, the end results were largely positive. You would have come out ahead if you were brave enough to invest during these difficult times. For example, a small investment of $100 in the S&P 500, at the beginning of 2009, would have represented a 582.13% return on your investment by the 2021 year-end.
It's hard to come to grips with the economy and stock market vicissitudes. Recessions happen on a regular basis, as it's part of the capitalistic cycle.
The U.S. may need to endure some rocky times for the foreseeable future. However, if history repeats, it may take some time, but Americans will soon see better days.
What’s likely to happen is that after a few years, the government and Fed will forget about the past and enact more accommodative policies that will lead to another bull run, which will go to excess and ultimately burst. Then, the cycle will start all over again.
