- While some industries are more vulnerable to economic fluctuations, others tend to do well during downturns.
- However, no organization or industry is immune to a recession or economic downturn.
- During the COVID-19 epidemic, the consumer goods and alcoholic beverage sectors functioned admirably.
- During recessions and other calamities, such as a pandemic, consumer basics such as toothpaste, soap, and shampoo have consistent demand.
- Because their fundamental products are cheaper, discount businesses do exceptionally well during recessions.
What commodities increase in value during a recession?
During market downturns, precious metals such as gold and silver tend to do well. However, because demand for certain commodities tends to rise during recessions, their prices tend to rise as well.
There are several ways to invest in precious metals. Purchasing coins or bars from a vendor or coin dealer is the most straightforward option. While this is not the same as purchasing a security, it is technically equivalent to any other choice.
If you want to invest in precious metals, look into exchange-traded funds (ETFs). These funds are pools of money invested in a single industry, in this case the precious metals market. If you’re saving for retirement, you might also invest in a gold IRA.
During the Great Recession, which assets performed well?
With markets in shambles as the Coronavirus spreads, it’s worth looking back at the Global Financial Crisis of 2007-2009. This was the worst financial catastrophe most investors had ever seen.
- How could investors have secured their portfolios during the Great Recession and earlier financial crises?
What causes major bear markets and recessions?
The majority of financial crises occur when financial assets trade at inflated, often illogical, values. This can happen for a variety of reasons. Market bubbles are frequently fueled by “easy money.” Consumer price inflation is not as high as it used to be because of low interest rates and cheap borrowing. However, they do cause asset price inflation. Low interest rates and credit availability, along with market narratives, frequently result in bubbles.
Bubbles have popped in internet stocks, real estate (during the Great Recession), cryptocurrencies, and cannabis stocks over the last two decades. All of these bubbles had one thing in common: they all told a story about how big these businesses will become in the future. It doesn’t take much to start a trend with cheap money and a compelling story. The tendency is then interpreted as evidence that the narrative is right, resulting in an influx of buyers to the market. Bubbles are frequently fueled by regular investors, who are aided by the financial media.
In a nutshell, historical tendencies are extrapolated, and investors are concerned about missing out. Valuations and economic reality aren’t given any thought. One of two things happens eventually. There will be no more buyers when everyone who is likely to invest has already done so. Any negative news now will cause the trend to reverse.
On the other hand, news will eventually reveal how overvalued assets have gotten. The cannabis industry is a recent example. After recreational cannabis was legalized in Canada for a year, it became clear that the market was a fraction of what had been predicted.
What happened during the Global Financial Crisis?
Here’s a quick rundown of what happened leading up to, during, and after the Global Financial Crisis:
Between 2001 and 2006, the US housing market experienced a bubble. Low interest rates and a surge in subprime lending contributed to this. Lending methods became riskier as the bubble grew. Banks began to issue mortgage-backed securities, allowing institutions to participate in the subprime mortgage market. This insured that money could keep flowing into the market. The bubble would have broken much sooner if this hadn’t happened.
In their own trading operations, banks also increased the leverage they utilized. To meet demand, they began to develop fake goods tied to the mortgage market. Because of the scale of the bubble that was forming, several hedge funds and bank dealers were glad to offer these goods.
In 2006, property prices finally began to decline. This resulted in mortgage defaults by homeowners who relied on capital appreciation to fund their loans. Lenders foreclosed on homes and then attempted to resell them. The property market was put under even more strain as a result of this. As the number of defaults mounted, investors realized how much danger they had taken on by purchasing mortgage-backed securities. They attempted to sell the securities, but there were no takers at the time.
Mortgage-related funds began to fail in 2007. Notably, two Bear Stearns-backed funds failed, resulting in significant losses for the bank. Liquidity in the economy dried up as banks began to deleverage and restrict their exposure to the subprime market. The fallout from the banking and real estate industries expanded to the stock market in October, causing stock prices to plummet.
Early in 2008, the first economic stimulus package was passed, although it was too late for several businesses. Despite a bailout attempt by the US Treasury Secretary in March, Bear Stearns failed. To keep the entire mortgage market from collapsing, the government was compelled to take over Fannie Mae and Freddie Mac later in the year. Then Lehman Brothers went bankrupt, and Bank of America purchased Merrill Lynch, which was on the verge of going bankrupt.
Liquidity difficulties in US markets had begun to affect markets around the world by this time. The global financial system was drained of liquidity and credit availability due to a lack of liquidity in the US banking sector. This is why the credit crisis is commonly referred to as the market meltdown.
Around the world, economic stimulus programs were enacted between September 2008 and February 2009. The American Recovery and Reinvestment Act of 2009, the most recent of these, was a $787 billion economic stimulus plan adopted in February. Soon after, markets began to rebound but it took four years for stocks to recoup their losses.
What caused the GFC?
The Global Financial Crisis was brought about by a confluence of events. The reasons of the Great Recession can be divided into three categories:
Housing bubble
The Global Financial Crisis can be traced back to an increase of sub-prime lending combined with extremely low interest rates. Sub-prime loans are those granted to people who have poor credit, few assets, and may not have a stable income. Following the dotcom bubble, US interest rates peaked at roughly 7%. After that, by 2004, they had dropped to record low levels. Mortgages become more accessible for low-income people due to the low interest rate environment.
The mortgage industry has become extremely profitable and competitive. To ensure that they could obtain as much business as possible, lenders began cutting corners and even committing fraud. As a result, many people with little income and resources were forced to take out mortgages they couldn’t pay and didn’t comprehend.
The position in which government-backed mortgage markets found themselves magnified the volume and quality of mortgages. Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation) are mortgage securitization businesses. The government backs the mortgages these businesses sell, but they still have to compete in the market like any other institution. They have to take on more hazardous mortgages sold by banks in order to maintain market dominance.
Despite the fact that interest rates began to rise in 2004, they remained historically low. More purchasers entered the real estate market as a result of low rates and easier access to financing. As a result, property values have risen. People began purchasing homes solely on the premise that the mortgage costs would be covered by capital gain. If you’re able to refinance or “You can effectively cover the mortgage with the capital gain if you “flip” a house at a higher price every few months.
As the subprime market got more competitive, lenders began issuing different types of mortgages in order to appeal to a broader range of potential house purchasers. All of these mortgages had one thing in common: they made mortgage payments more affordable for the first few months. The hitch was that in many situations, after an initial period, the repayments would climb. Lenders were unconcerned about defaults since defaulting would result in the lender becoming the owner of the property and house prices were soaring. Millions of people effectively become speculators with highly leveraged investments as a result of these loans.
People began purchasing second and third homes as a result of this strategy’s success. Many of them were bought with no-money-down mortgages. Furthermore, many of the mortgages were foreclosed on “For the first several months, the loans were “interest only” and required no repayments.
Complex financial products and leverage
The size of the Global Financial Crisis is largely due to the new financial instruments that contributed to the creation of the bubble. Bubbles usually burst when interest rates rise and there isn’t enough money to support greater prices. During the Global Financial Crisis, however, banks discovered a means to keep money pouring into the housing market, including the subprime sector.
MBSs (mortgage-backed securities) are mortgage pools that can be sold on secondary markets. MBSs have been replaced by collateralized debt obligations (CDOs), which are more complicated variants of MBSs. CDOs are divided into tranches based on their risk level. The safest tranches pay lower interest rates, whereas the riskier tranches pay higher interest rates. Rates AAA were the safest tranches, while rates BB- were the riskiest.
CDOs were repackaged throughout time to create new CDOs. The process of rating products became more obfuscated as the products became more complicated. CDOs containing exclusively high-risk mortgages were eventually rated AAA. This allowed pension funds all across the world to invest in the riskiest home loans, many of which they had no idea about.
New products were introduced as if dangerous derivatives with AAA ratings weren’t enough. Credit default swaps were introduced by banks to allow investors to insure their CDOs against default. These swaps have the same mortgage markets as CDOs. As a result, when the mortgage market started to slow, investors began betting on it via swaps. Credit default swaps were subsequently packaged into synthetic CDOs, which were new products. Rather than investing in mortgages, investors were betting on the mortgage market.
Fraud, conflicts of interest and regulatory failure
The Global Financial Crisis was facilitated by unethical behavior throughout the financial system. Fraud, conflicts of interest, and a lack of regulatory control were among the issues. To boost sales, mortgage originators frequently employed aggressive sales tactics and deception. Home buyers were urged to inflate their financial circumstances, and paperwork were frequently faked.
Rating organizations such as Standard & Poor’s and Moody’s were paid by the banks that constructed CDOs to rate the products. This created a significant conflict of interest because the rating agencies would only be compensated if the rating was favorable to the issuers. Banks were able to market exceedingly risky goods with investment grade ratings as a result of this. It also provided investors the misleading impression that the things they were purchasing were safe.
The issue was exacerbated by deregulation that occurred in the 1980s and 1990s. Bank trading operations expanded in importance and became a significant source of revenue. In addition, banks increased the amount of leverage they utilized to boost trading profits. Many banks and financial institutions realized they were too large to fail at the same moment. They understood that if things went bad, the government would bail them out.
When banks began wagering against their customers, another conflict of interest occurred. They produced items to meet client demand while also acknowledging that the products they were selling were extremely dangerous. They then began selling synthetic CDOs to clients, effectively wagering against them.
Regulators also contributed to the crisis by enabling risks to spread across the system. Although subprime lending was always understood to be dangerous, there was minimal regulation in place. The rating agencies were not regulated, allowing them to benefit from inaccurate ratings. And, with little action from regulators or central banks, banks were permitted to trade with growing amounts of leverage.
How did different asset classes perform during the Global Financial Crisis?
Because risk assets were hit so hard by the Great Recession, it’s important to understand how other asset classes fared. From the end of October 2007, when the S&P500 peaked, to the end of February 2009, when equities began to rebound, the following table shows how some of the key assets performed. The table also shows how long it took each asset class after February 2009 to recoup its October 2007 levels.
- All of the equity markets were highly connected. While emerging world stocks fared the worst, large-cap US stocks fared no better.
- The majority of alternative asset classes, such as hedge funds, gold, and commodities, outperformed traditional asset classes such as stocks and bonds.
- While some hedge funds did exceptionally well, those with negative reruns only lost about 5% of their value.
- Junk bonds, international stocks, and emerging market equities have yet to return to pre-crisis levels eleven years later. This is partly due to USD outperformance in the case of equities.
While each asset class’s performance differs from crisis to crisis, there is some continuity. The returns of 16 asset classes were examined in a Visual Capitalist article during the five major market crises, including the Great Recession. While the average losses were lower throughout all five periods, a similar pattern emerged.
Hedge funds, US treasuries, and gold were the best-performing assets. Stocks, junk bonds, and listed property investments were the lowest performers. Long-term returns must also be considered when looking at these returns. Long-term returns are higher for riskier asset groups. Long-term returns on alternative assets are lower, but they outperform during periods of market turbulence.
It’s also worth noting that individual hedge fund performance might vary significantly an index is a rough approximation of the returns of various sorts of funds. Some hedge funds that focused on subprime-related securities blew up during the GFC, while others returned more than 500 percent. Many of those who fared well in 2010 did not continue to do well after that. This emphasizes the point that hedge funds that specialize on a small number of markets may not be good long-term hedges.
How investors could have protected their portfolios during the GFC and other crises
The above returns demonstrate that, while risky assets such as stocks perform well over time, they can lose value quickly during a major event such as the Global Financial Crisis.
The only way to protect a portfolio from such disasters is to include alternative assets and bonds in the mix. The most reliable portfolio hedges are bonds, gold, and hedge funds. Because private equity, venture capital funds, and real estate are not marked to market every day, they can help to lessen volatility.
Conclusion: Learnings from the Global Financial Crisis
The Global Financial Crisis of 20072009 demonstrated the financial system’s complexity. The contagion swept across the world’s equity markets, causing even well-diversified equities portfolios to lose a significant amount of value. A portfolio with effective asset allocation can profit from long-term stock market growth while also surviving periodic downturn markets. Rebalancing asset classes also allows cash to be re-invested in risk assets when values are low and taken off the table when they are high.
Sometimes, like with black swan occurrences like the Coronavirus epidemic, there are warning indications before a catastrophe like the GFC, and sometimes there aren’t. The best way to avoid this is to diversify your portfolio at all times.
What should I buy before the financial crisis?
Having a strong quantity of food storage is one of the best strategies to protect your household from economic volatility. In Venezuela, prices doubled every 19 days on average. It doesn’t take long for a loaf of bread to become unattainable at that pace of inflation. According to a BBC News report,
“Venezuelans are starving. Eight out of ten people polled in the country’s annual living conditions survey (Encovi 2017) stated they were eating less because they didn’t have enough food at home. Six out of ten people claimed they went to bed hungry because they couldn’t afford to eat.”
Shelf Stable Everyday Foods
When you are unable to purchase at the grocery store as you regularly do, having a supply of short-term shelf stable goods that you use every day will help reduce the impact. This is referred to as short-term food storage because, while these items are shelf-stable, they will not last as long as long-term staples. To successfully protect against hunger, you must have both.
Canned foods, boxed mixtures, prepared entrees, cold cereal, ketchup, and other similar things are suitable for short-term food preservation. Depending on the food, packaging, and storage circumstances, these foods will last anywhere from 1 to 7 years. Here’s where you can learn more about putting together a short-term supply of everyday meals.
Food takes up a lot of room, and finding a place to store it all while yet allowing for proper organization and rotation can be difficult. Check out some of our friends’ suggestions here.
Investing in food storage is a fantastic idea. Consider the case of hyperinflation in Venezuela, where goods prices have doubled every 19 days on average. That means that a case of six #10 cans of rolled oats purchased today for $24 would cost $12,582,912 in a year…amazing, huh? Above all, you’d have that case of rolled oats on hand to feed your family when food is scarce or costs are exorbitant.
Basic Non-Food Staples
Stock up on toilet paper, feminine hygiene products, shampoo, soaps, contact solution, and other items that you use on a daily basis. What kinds of non-food goods do you buy on a regular basis? This article on personal sanitation may provide you with some ideas for products to include on your shopping list.
Medication and First Aid Supplies
Do you have a chronic medical condition that requires you to take prescription medication? You might want to discuss your options with your doctor to see if you can come up with a plan to keep a little extra cash on hand. Most insurance policies will renew after 25 days. Use the 5-day buffer to your advantage and refill as soon as you’re eligible to build up a backup supply. Your doctor may also be ready to provide you with samples to aid in the development of your supply.
What over-the-counter drugs do you take on a regular basis? Make a back-up supply of over-the-counter pain pills, allergy drugs, cold and flu cures, or whatever other medications you think your family might need. It’s also a good idea to keep a supply of vitamin supplements on hand.
Prepare to treat minor injuries without the assistance of medical personnel. Maintain a well-stocked first-aid kit with all of the necessary equipment.
Make a point of prioritizing your health. Venezuelans are suffering significantly as a result of a lack of medical treatment. Exercise on a regular basis and eat a healthy diet. Get enough rest, fresh air, and sunlight. Keep up with your medical and dental appointments, as well as the other activities that promote health and resilience.
In the event of a financial meltdown, what will be valuable?
In the case of an economic collapse, food will become one of the most precious commodities on the planet. You will not be able to survive if you do not have food. Most American families could not survive for more than a month on what they currently have. So, how do you feel? How long could you survive on what you have today if calamity hit right now? The reality is that we all need to begin stockpiling food. If you and your family run out of food, you’ll find yourself competing with hordes of hungry people raiding stores and roaming the streets in search of something to eat.
You can, of course, cultivate your own food, but it will take time.
As a result, you’ll need to have enough food on hand to tide you over until the food you’ve planted matures.
However, if you haven’t saved any seeds, you might as well forget about it.
When the economy fails completely, the remaining seeds will vanish swiftly.
So, if you think you’ll need seeds, now is the time to purchase them.
Which companies prospered during the Great Depression?
Chrysler responded to the financial crisis by slashing costs, increasing economy, and improving passenger comfort in its vehicles. While sales of higher-priced vehicles fell, those of Chrysler’s lower-cost Plymouth brand soared. According to Automotive News, Chrysler’s market share increased from 9% in 1929 to 24% in 1933, surpassing Ford as America’s second largest automobile manufacturer.
During the Great Depression, the following Americans benefited from clever investments, lucky timing, and entrepreneurial vision.
What do safe haven assets entail?
A safe haven investment is an asset that can be utilized to reduce an investor’s exposure to negative shocks by offsetting the risk in their portfolio. Safe haven assets generally beat the bulk of financial markets during a market collapse.