Why It Matters
It’s a pretty simple fact if anyone had any idea how the stock market drop that started in 2007 would play out, they would have changed many things about not only how they ran their business but also their personal finances. Well, many people did know, and they were telling everyone who would listen. The problem is that the message is mixed in with a lot of other market and finance talk that makes up the 24 hour media cycle that can’t actually be filtered for truly useful information.
The economists were talking specifically about a measured event named a Recession. A Recession is generally identified by a fall in Gross Domestic Product (GDP) in two successive quarters. GDP is simply the value of all the goods and services produced in a given country in the most recent business quarter. And a Recession is not so easy to call as just two consecutive quarters of negative GDP. That’s the main reason it is regarded as a lot of economist speak and no one pays attention until it’s officially called by entities such as the US Federal Reserve Board. On the other side, we had the money and fiance talking heads telling us about how great the stock market was, and there was a little drop and a little pull back, but keep on spending, yea!
But had you been watching the US Markets, and knew what you were looking at, certainly by 2008, you would have seen an economic downturn. Economic downturn is no more than the slowing down in economic activity, and it is easily seen in the prominent stock markets. There is no official call of a downturn by the Federal Reserve, it’s just a noticeable trend down. Had you recognized it, you would have been making plans accordingly to reduce risk and move cautiously with new ventures based on the clearest and most prominent sign the market was giving. The markets were trending down and had been for a year. And it continued to do so for another year beyond until it finally turned up in earnest in the summer of 2009.
Anyone knowing what they were looking at would have been responsibly tending to their business and planning for the eventual upturn and run to higher numbers. I can personally guarantee you that the big financial companies like Goldman Sachs and Charles Schwab were. And so were big corporations like Microsoft, Intel, Apple and so on. They all had grand plans laid out and on hold, just waiting for the time when money loosened up to roll them out. And this is how you should be strategizing as well. Of course, I also believe you should always be running your business as if there were an economic downturn right around the corner.
Now, I don’t mean scared or reserved, but I do mean aware and prepared. You should always have your strategy for reigning in your spending, knowing what programs and ventures will get cut or reduced, and even knowing who or if you will lay off if the time comes. It starts with proper budgeting but goes far beyond to contingencies laid out ahead of time. You need to be prepared for when your customers come to you asking for a reduction in fees or pricing because they too are feeling the pinch. You need to be prepared to go to your vendors with the same questions as well. And most of all, you need to be prepared for money to just straight up dry up.
Money gets scarce quickly when the market is down and loose when it’s up. There’s an old saying about how the bank is only willing to lend you money when you don’t need it. Well, set yourself in fat times to be able to withstand the lean times. Cash is king, and you need to respect that or you will not make it through a downturn. I speculate that the majority of small businesses who did not make it through the last economic downturn failed because they were not agile enough to make the required changes, conserve cash flow, and reduce spending in a timely fashion. That is, they did not move quickly enough once they saw enough signs that made them believe this was not going to turn around any time soon.
In the most recent 20 years, there have been only two really significant economic downturns. Both were official US Recessions, and both are prominently seen in the US Markets Dow Jones Industrial Average (the Dow). The Dow Jones Industrial Average is simply one of several major indices of the US Market. I could use one of many other indices for my example, as all the major indices would show the same data; however, I choose the Dow.
The downturns were in the years 2000 and 2007 and were named the “Dot-com Bubble” and the “Housing Bubble,” respectively. Statistics show that the official Recessions lasted from March 2001 to November 2001 (8 months) for the Dot-com Bubble, and from December 2007 to June 2009 for the Housing Bubble. But what I would like you to see is the indicators as seen on the graph. Leading up to the Dot-com Bubble, we see a downward trend in the market that started in January of 2000, over a year before the official Recession. And the downward trend lasted until late October 2002, almost a full year after the Recession was over. Leading up to the Housing Bubble, we see a downturn begun fully six months before the official Fed call of the Recession. And this downturn was over 3 months before the official Recession was called.
You can, by the way, know every Recession we’ve had in the US - when they started, when they ended, and how long they lasted. There is no set pattern or cycle, but by learning about them, you can get a least a basic understanding of how they play out, and that is what truly matters. If you learn to care about when we are in or out of a recession, you can make solid business plans and strategy based on this knowledge. Simple planning can absolutely save your business, the absence of which may allow you to run your own business right into the ground.
I’ve really only told you everything to this point so I can get to what’s happening in the markets today. Having studied markets and done a considerable amount of trading, I’ve learned at least a few things. One is a signature in a trend line called a Triple Top. First, the stock market graphs we always see are just a recorded history of the performance of those stocks or group of stocks being tracked. A trend line is the indication of the general course or tendency of something being tracked. The Triple Top happens when the stock or stocks performance hits a high, usually an all-time high, then bounces back (or down) only to continue to try to push up to higher numbers, three times in a row. If you look at our graph, you should see a Triple Top that did its first bump in May 2015.
The second bump was on November 6, 2015, and it did not push through to higher numbers. As of today, there was a third bump on April 20, 2016. Currently, the market is trying to push up to higher numbers, and it may very well do so or it may bounce a little more - only time will tell. What I can tell you is that this Triple Top has been developing for about six months, and it could take it a few more to complete its pattern. What is its pattern, you ask? Good question.
The pattern of a Triple Top is a prominent sign that a trend is “most likely”going to do one of two things. 1: The trend will pull back (drop) from its third bump to some unknown lower level to alleviate pressure in the system, so to speak. If this happens, we would see something as simple as what is called a Slide, Pull Back, or Retrace in stock terms. We could also see the next big economic downturn. The other option is 2: The market pushes up through the third bump and moves to new heights. These heights could be as simple as a steady and modest increase, but the triple top is known for signaling large moves if it is to the high side. Stated another way, if the Triple Top breaks through, it would be expected to so see a good run to much higher numbers, i.e. a strong push upward.
Need To Know
So what now? We wait. But if we are diligent, we should be making plans for either scenario. Again, I guarantee all the big corporations are ready and they know what they will do. The financial institutes are ready and they know what they will do. If it’s rolling on past this point to new highs, they will continue their plans and maybe even be more aggressive. You’ll get more offers in the mail for cards you don’t need and products you’ll never use. If it’s a downturn, they will pull in, pull back and batten down the hatches. Your credit line will get shortened, and your customers will tell you they need a little break.
The one last and most important element I will tell you is this: The market doesn’t like uncertainty. Financial markets tend to get skittish when there are things happening in the world or the country that are unstable or uncertain. Markets can actually go sideways. Markets can go sideways for a long time, waiting for solid signs of forward progress, or solid decline. And the market doesn’t care which, as long as it’s solid in its intent. If you look at the long term graph of the Dow, you will actually see that over the last year, this Triple Top I’ve pointed out to you is actually the market moving sideways. Not significantly up or down, but sideways.
Any guesses what the most uncertain thing effecting the market today is, the major contributor? China? Nope. The market already knows and is anticipating their moves, assuming there are no curve balls. Terrorism? Nope. The market has long since adjusted to the new common threat levels; again, assuming there are no new major events. The UK and EU potential breakup? Sorry, nope. The market has already adjusted, and although this developing story may be contributing in some small way to the sideways trend of the market, it’s not what’s got it riled. The largest uncertainty in the US Market is the impending election of the next President of the United States.
And again, the market does not care who it will be. It will not matter if it is Sanders, Clinton, Trump or a green Muppet. But once the decision has been made, assuming there are no other significant threats to the certainty of the market, it will move along its intended path, and the long standing upward trend will continue. Now, unfortunately I cannot guarantee it will continue up, but the prominent long-term trend is up. Also, the short term trend right now is sideways, and the market would like to move higher and likely will once the election is over. But it may get thwarted if we find ourselves in a new recession later in the year or early 2017. And one last time, this is regardless of who is elected.
The upcoming election is the uncertainty holding the market back from its five year uptrend . A new recession would be what holds it down, and it would be for at least a year if not more based on recession history. Luckily, there is nothing on the horizon for recessions. We had a positive GDP in Q1 of 2016, so we’d have to have a bad Q2 and Q3 at least. But we wouldn’t know if the Fed is calling it a recession until some time in early 2017!
Learn what a recession is, when we are approaching or in one, and how long they last. Learn the basics of the US Stock Market and keep one eye on it at all times. Learn how the recession and the market dance together. Now, I’m not asking you to get a degree or spend your nights studying instead of focusing on your business. But knowing these few things can truly make the difference in making it through the next downturn or getting drowned by it.
Now for the fun part. I’ve written this article, and now I get to sit back and see how things flesh out. I get to see if my reading is right. But most important, I have my eye always on the market, because how it reacts will significantly influence how I run my business. It has to. Operating without the basic knowledge of the market, even if you’re just a pizza house, is ignorance. Operating with the basic knowledge of the market but not paying attention to the signs, however, is stupid.
Stock Market Axiom: Know when the Bulls are running and run with them. Know when the Bears are sleeping and sleep with them.
My personal opinion is that the market will continue sideways or at least not make big highs or lows until after the election. And then we will see big moves upward. Yes, there will be pull backs and retraces and they are expected. But I’m betting we will see a long run for several more years. Well, unless the new presidency screws it up. 🙂
Required disclaimer: I am not a financial analyst nor am I a financial advisor, and everything that I’ve written in this article should be taken with more than a grain of salt. It’s all just my opinion.