Scary Finances: The History and Definition of Recession, Depression, Bubbles, Bull and Bear Markets

Do the following words have you holding your head in fear and confusion - Recession, Depression, Bubbles, Bull and Bear Markets? Do you wonder when morning shows use them whether you should be celebrating or stuffing your money into a mattress? If so, you’re not alone. It can all be a bit bewildering. Good news is, we’re here to help. Let’s discuss the history and definition behind all these terms and what they mean for you.

Recession

  • Definition: A recession is defined by the National Bureau of Economic Research (NBER) as “a significant decline in economic activity spread across the economy, lasting more than two quarters which is 6 months, normally visible in real gross domestic product (GDP), real income, employment, industrial production, and wholesale-retail sales.” Simply stated it’s a period of six months during which the country’s economy has declined.
  • History: By most authorities, the United States has gone through forty-seven recessions over time. There is some dispute regarding a few of those recessions as unemployment, and GDP data weren’t captured or standardized prior to World War II. Recessions are typically triggered by a drop in spending as the economy naturally rises and falls.

Depression

  • Definition: A depression is an extended recession that has two or more years of economic decline. It's more severe than a recession. It is characterized by a substantial increase in unemployment, available credit drops, housing prices plummet, reduced trade and commerce and price falls. In layman’s terms, the economy shuts down.
  • History: The US had experienced several depressions before the stock market crash on October 27, 1929, but none were as severe or lasted as long. The Great Depression (1929-1939) devastated the US economy. Unemployment rose to 25 percent, housing prices plummeted 30 percent, global trade collapsed by 60 percent and prices fell 10 percent.  At the country’s lowest point, 15 million Americans were unemployed and half the US banks had failed. Since the Great Depression, numerous laws and government agencies have been put in place with the explicit purpose of preventing another catastrophic depression.

Bubble

  • Definition: A financial bubble occurs when the price of an asset or commodity rises to levels that strongly exceed the asset’s intrinsic value.
  • History: The U.S. has experienced two significant market bubbles over the past couple decades – the Dot-Com bubble of the 1990s and the US Housing bubble in the 2000s. The Dot-Com bubble was triggered by the introduction of the internet and companies achieving multi-billion dollar valuations as they went public. Many experts believe that the bursting of the Dot-Com bubble lead to investors piling into real estate, believing it was a safer option. House prices peaked at 2006. By 2009, the average US homeowner had lost one-third of its value. The bursting of the housing bubble would have a ripple effect on mortgage-backed securities, resulting in a global economic decline that would become known as the Great Recession.

Bull Market

  • Definition: A bull market refers to a time when prices of an asset or commodity are expected to rise. The use of the term “bull” comes from the way the animal attacks its prey.  A bull thrusts its horns up into the air.
  • History: The most notable bull market in recent US history started in 1982 and ended with the Dot-Com bubble burst in 2000. During this time, the Dow Jones Industrial Average (DJIA) averaged 16.8 percent in annual returns, and NASDAQ increased its value fivefold, rising from 1,000 to 5,000.

Bear Market

  • Definition: A bear market is the opposite of a bull market. In a bear market, prices of an asset or commodity decline substantially over a sustained period of time. The use of the term “bear” also comes from the way the animal attacks its prey. A bear swipes its paws downward.
  • History: The most recent bear market followed the Dot-Com and US housing bubble burst in 2000. From 2000-2009, the market struggled to establish footing and delivered average annual returns of -6.2 percent.

The Bureau of Economic Analysis released second quarter 2017 results for GDP showing an increase at an annual rate of 3.0 percent. This means that the U.S. economy expanded during the first half of 2017.

new york street intersectionIf you have questions regarding economic market terminology and what the verbiage means for you personally, contact your financial advisor. Don’t stay scared. Your financial advisor can help explain the current market trends and how they will impact your financial portfolio.

Wood Smith Advisors, a woman-owned Registered Investment Advisor (RIA), is a fee-only financial services firm that partners with its clients to simplify their financial lives. We focus on women, entrepreneurs and individuals with complex financial situations, providing objective and competent advice, education and services to help them develop and build their businesses and reach their financial goals. We can be reached by clicking here.

"Finance Made Simple" blog posts are intended for educational purposes and not for specific advice. Each person’s situation is different. Consult your financial advisor for advice relating to topics discussed.

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