Just one more depressing lesson, and then we’re done. I promise!
Next, we’ll talk about recessions and depressions.
Unlike corrections and bear markets, where these terms describe the stock market going down, recessions and depressions describe how much the economy is going down.
A recession is when a country’s economy, meaning the goods and services produced in the country, takes a hit and declines.
Let’s make it a little easier to understand. Let’s say you start a lemonade stand. Things are going great. You’re making lemonade and selling as quickly as you can. You have a line of people waiting to buy your lemonade. This goes on for several years. Then, all of a sudden, the line gets shorter and fewer people want your lemonade. When this happens to countries, it’s called a recession. A recession is when unemployment goes up and more people are out of work. Companies are not selling as much of their stuff. People are not rushing to the malls and filling their shopping bags. As a result, the total value of all goods and services produced over a month, or quarter, or year declines. That’s a recession. It’s when people, companies, and the country itself are not doing as well financially.
Could a recession lead to a stock market drop, such as a correction or a bear market?
Yes, it sure could. But, a recession really only describes the drop in the economy and not the stock market. You could have a recession, but not a drop in the stock market. Just like you could have a correction or drop in the stock market without a recession.
Okay, now the big doozy. A depression.
I get depressed just thinking about a depression. A depression really only applies to a single time in our country’s history. It was back in 1929. The stock market crashed and everything went to hell in a hand basket. Usually, there is about 5% or 6% of our population looking for work. Back in the depression, 25% of the people were out of jobs and looking for work. Our economic sickness spread throughout the world. It was a bad time for people everywhere. People didn’t have enough to eat. Not good. That was The Great Depression.
Okay, that’s it! No more talk of depressions and bear markets. Only unicorns and rainbows from here on out!
The proceeding blog post is an excerpt from Get Money Smart: Simple Lessons to Kickstart Your Financial Confidence & Grow Your Wealth, available now on Amazon.
About the Independent Financial Advisor
Robert Pagliarini, PhD, CFP®, EA has helped clients across the United States manage, grow, and preserve their wealth for the past 25 years. His goal is to provide comprehensive financial, investment, and tax advice in a way that was honest and ethical. In addition, he is a CFP® Board Ambassador, one of only 50 in the country, and a real fiduciary. In his spare time, he writes personal finance books, finance articles for Forbes and develops email and video financial courses to help educate others. With decades of experience as a financial advisor, the media often calls on him for his expertise. Contact Robert today to learn more about his financial planning services.