It Takes Longer to Stand Up Than to Fall<\/h2>\n
Going back to World War II, the average bear market has taken 13 months for stocks to fall from their zenith to their nadir. But they take longer to recover: From the trough to climbing back to the pre-bear market high took an average of 22 months.<\/p>\n
It took 16 months for the S&P 500 to reach its lowest point during the Great Recession. Investors had to wait another four years before stocks recovered their lost ground in 2013.<\/p>\n
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If that sounds bleak, consider that stocks recover faster than just about any other financial indicator. Take the unemployment rate for example. It reached a recent low point of 4.7% in 2007, then surged over 10% during the Great Recession. It didn\u2019t reach 4.7% again until almost halfway through 2016. When the stock market had fully recovered in 2013, the unemployment rate in the U.S. was still over 8%.<\/p>\n
Which raises a related point: businesses and investment assets (the foundation of the wealthy\u2019s income<\/a>) recover faster and farther than wage incomes (that sustain the working- and middle-classes).<\/p>\n Related: <\/em><\/strong>Investment Success in Good & Bad Times: A Recession-Proof Investing Plan That\u2019s Never Failed Me<\/a><\/em><\/p>\n Adjusting for inflation, median U.S. incomes peaked in 2007, before collapsing nearly 10% over the next five years. This means real incomes kept falling years after the Great Recession technically ended in 2009.<\/p>\n It took nearly 10 years for the average American to recover their pre-recession income. Inflation-adjusted incomes<\/a> didn\u2019t surpass their 2007 levels until 2016.<\/p>\n Next, consider net worth. The bottom 50% of Americans reached peak asset holdings in early 2008 and didn’t surpass that peak again until late 2017.<\/p>\n In contrast, the top 90-99th percentile of Americans recovered their previous peak in net worth by early 2011. And by the end of 2019, they had nearly doubled their net worth since the Great Recession\u2019s trough.<\/p>\n That jump in net worth among wealthier Americans was largely driven by stocks. The top 10% of U.S. households<\/a> own roughly 84% of the country\u2019s stocks. Making matters worse for \u201cJoe Six-Pack,\u201d the percentage of Americans who own any stocks at all has dropped since the Great Recession, as middle-class workers got spooked.<\/p>\n From a pre-recession high of 62% of Americans owning at least some stocks, that number dropped to a post-recession low of 52% before rebounding slightly to 55%.<\/p>\n Too many Americans stuck around for the market collapse, only to flee stocks and miss the subsequent recovery.<\/p>\n Everyone knows the famous quote by Baron Rothschild: \u201cThe time to buy is when there\u2019s blood in the streets.\u201d It was true 300 years ago, and it\u2019s true today.<\/p>\n In times of recession and economic crisis, asset prices typically fall. That\u2019s bad news for anyone holding those assets at the time\u2014if they panic and sell. It\u2019s good news for the calm, collected investor who resists the herd psychology of panic and scoops up assets like stocks and real estate while everyone else cries that the sky is falling.<\/p>\n This is not to say recessions don\u2019t bring greater risk for investors. Anyone looking to invest in real estate during the pandemic<\/a> should understand heightened risks like eviction restrictions included in the CARES Act<\/a>. But with those greater risks come greater opportunities. Looking back at the Great Recession, the average American home value fell roughly 30%, then recovered with a vengeance between 2012 and 2020.<\/p>\n While it\u2019s too early to parse any larger real estate trends from the COVID-19 recession, stock investors saw a deep plunge of over 30% early in the pandemic, before recovering most of those losses in mere weeks.<\/p>\n But in order to invest during times of crisis, you need more than a steady hand and keeping your cool. You also need cash to invest with.<\/p>\n Related: <\/em><\/strong>Will the U.S. Face Another Foreclosure Crisis in 2020?<\/a><\/em><\/p>\n It marks another reason why the wealthy do better than poorer and middle-class Americans during recessions: They can capitalize on the drop in asset prices. In the face of skyrocketing unemployment and wage losses, working- and middle-class Americans often can\u2019t follow suit even if they see the opportunity.<\/p>\n Having cash to invest helps in any era, of course. But that\u2019s not the only factor at play during recessions.<\/p>\n In recessions, lenders typically tighten up, requiring stronger credit scores and debt-to-income ratios, even as they lend lower LTVs. So while working- and middle-class Americans see their incomes fall and their debts rise during recessions, they have a hard time borrowing a mortgage to invest in real estate. This leaves\u00a0less competition for cash investors, who can score excellent deals during times of crisis. Because during recessions, there are more distressed sellers, more people who need to sell now<\/em>, to settle within the next five days.<\/p>\n Cash investors can deliver that speed; leverage investors can\u2019t. At no time does cash\u2019s crown shine brighter than during recessions.<\/p>\n All of which reinforces why you should pursue financial freedom<\/a> during \u201cnormal\u201d times, during economic expansion. The more wealth and investment assets you can build during expansionary periods, the better positioned you\u2019ll be when economic crises hit\u2014positioned not just to survive them but to capitalize on them and thrive.<\/p>\n Looking back over the last century, real estate values have proven far more stable than stocks<\/a>. “Housing is a basic necessity and therefore are more resilient and not as volatile as stocks,” notes Chuck\u00a0 Hattemer, co-founder of Onerent Property Management<\/a>. That lower volatility helps reduce the risk of investing in real estate versus stocks and makes real estate a great asset to own during recessions<\/a>.<\/p>\n Curiously, rents have remained even more resilient and stable than property values. One of the main reasons real estate prices are so much more stable than stock prices is their low liquidity\u2014it takes months to sell a property on average, compared to seconds to sell a stock. Yet rents are free to shift and move with no lag time between when a property lists for rent and when the two parties can execute a lease and the tenant moves in.<\/p>\n Here\u2019s the price index for rents since the early ’60s:<\/p>\n As you can see, rent growth tends to flatten slightly during recessions. But nationwide rents never drop like stocks do, or even like nationwide home prices occasionally dip:<\/p>\n On the local level, investors can forecast rent and home price changes to a degree. \u201cSince job growth and company expansions dictate where renters will live, they are stable predictors for where housing demand will rise in the future,” continues Hattemer. Rents may not be perfectly predictable, but they’re certainly more predictable than stocks.<\/p>\n Recessions hit everyone, rich and poor alike, reducing their incomes and net worth. The wealthy may recover faster, but they still get hit.<\/p>\n That drives many renters and homeowners alike to ditch their expensive home in favor of something more affordable. We\u2019re already seeing this play out. A study by HousingWire<\/a> found that far more renters plan to non-renew their leases than usual in the wake of the coronavirus pandemic, with only 26.1% of renters planning to renew. But those numbers are even uglier for higher-end rentals: Among tenants paying $1,750 or more, only 18.7% plan to renew.<\/p>\n Indeed, homebuilders have overbuilt luxury homes over the last decade<\/a>, chasing the higher margins they offer. That leaves a shortage of affordable housing and a glut of luxury homes.<\/p>\n We’re already seeing luxury homes slipping. In Spring 2020, luxury home prices fell 2.3% year-over-year, according to Redfin<\/a>, while prices of affordable homes jumped 5.5%.<\/p>\n Recessions strain local and state government budgets. They collect less revenue across the board, as businesses and individuals earn less and spend less.<\/p>\n But how governments respond to that strain varies based on their fiscal philosophy. Fiscally liberal governments respond by raising taxes, while fiscally conservative governments respond by temporarily cutting spending.<\/p>\n Here\u2019s the catch though: Governments that raise taxes in the wake of recessions rarely lower them again once the recession ends. That leads to an endless broadening of tax burden.<\/p>\n Consider my home state of Maryland. In the Great Recession, Maryland raised its sales tax from 5% to 6%, raised its corporate income tax from 7% to 8.25%, raised its tobacco tax by another $1 per pack, and instated a new 6.25% \u201cmillionaire tax\u201d in addition to all the existing taxes on high earners.<\/p>\n To this day, Maryland still charges all of those higher taxes (with the exception of the millionaire tax\u2014more on that momentarily). When the crunch of the Great Recession passed, they simply found fresh ways to spend that extra tax revenue.<\/p>\n The millionaire tax was a particularly telling case study in taxation gone awry. In the year after the tax went into effect, Maryland saw a 30% drop in millionaire filers. Some of that drop could have come from the impact of the recession itself, of course. But many of the filers who previously fell into the group covered under the new tax moved out of state and didn\u2019t file a Maryland income tax return at all in the following years.<\/p>\n Realizing their mistake, Maryland later retracted the millionaire tax. But the damage was done; a study by Bank of America Merrill Lynch estimated that Maryland lost over $1 billion tax revenue<\/a> over the millionaire tax debacle in 2008 alone. And you can be sure those high earners didn\u2019t suddenly move back to Maryland after the tax was revoked.<\/p>\n The bottom line: recessions can increase the tax divide between high-tax and low-tax jurisdictions. Already, the state with the highest tax burden (New York) charges nearly three times as much as the state with the lowest tax burden (Alaska). Consider voting with your feet if you find yourself in a high-tax state<\/a>\u2014tax policies certainly won\u2019t get better in the aftermath of today\u2019s recession.<\/p>\n Today\u2019s coronavirus recession isn\u2019t the Great Recession 2.0. The causes were different, the financial system was on more stable footing going into it, and it happened far faster. Housing and mortgage markets have changed quite a bit since the Great Recession<\/a>\u00a0and have not driven today’s recession.<\/p>\n But that doesn\u2019t mean we can\u2019t draw any parallels, or learn from the last recession.<\/p>\n Expect jobs\u2014particularly lower-income jobs\u2014to recover far slower than asset prices. Incomes, especially lower incomes, will similarly take longer to recover. That makes subsidized housing, such as Section 8, more attractive than usual<\/a>\u00a0over the next year or two.<\/p>\n Those with cash to invest can expect opportunities but also greater risk than usual. Beware of asset price swings, stagnating rents, and higher rent default and eviction rates than usual, in addition to eviction backlogs once moratoriums lift.<\/p>\n All in all, those who aggressively saved and invested during the bull market find themselves in a far better position today than those with fewer assets. Learn from recessions and expansionary cycles to always invest more of your income than you think you need to. Because while recessions are hard on everyone, they\u2019re far kinder to those with means and financial savvy.<\/p>\nThe Working- & Middle-Classes Get Hit Harder<\/h2>\n
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<\/a><\/p>\nEconomic Crises Create Opportunity<\/h2>\n
Cash Is King During Recessions & Their Recovery<\/h2>\n
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<\/p>\nRents Are More Resilient Than Home Values<\/h2>\n
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<\/p>\nDemand Remains Stronger for Affordable Housing During Recessions<\/h2>\n
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<\/p>\nBeware of Tax Hikes in Tax-Happy Jurisdictions<\/h2>\n
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<\/p>\nFinal Thoughts<\/h2>\n
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