Opportunities In Recessions
A recession is now a matter of “when” and not “if.”
Banks and economists say the U.S. economy could be heading into recession next year. –Washington Post
Wells Fargo sees the end-of-year U.S. recession and cuts GDP view. -Reuters.com
A top Morgan Stanley strategist thinks the risk of a recession has gone up ‘materially,’ and stocks could fall another 15%. –Fortune.com
In the face of disaster, the natural human reaction is to run or take cover. In the face of economic disaster, that’s exactly what many investors do. They retreat – as evidenced by the recent selloff in the stock market. Some retreat, and then some seek opportunities.
Most of us have heard of “dry powder” in investing. It’s a term for the cash reserves that ultra-wealthy individuals, venture capital firms, and private equity funds keep on hand to quickly take advantage of opportunities, often for bargain hunting in a downturn. So, if I told you that the levels of dry powder that these investors have been keeping on hand recently are at an all-time high, that should tell you something about what these investors are expecting of the economy in the near future.
Judging by the amount of dry powder they’re keeping on hand currently, the ultra-wealthy are expecting a downturn, and they plan on going bargain hunting.
The lesson here for the rest of us is that there are opportunities in every economic climate – even during recessions. Why retreat when you can profit from a downturn?
Economics 101: Supply and Demand
Investors may have emotions, but markets don’t. Not all markets shrink in a downturn. All things being equal, prices rise in the face of rising demand or falling supply. So, if you want to know where the opportunities are, follow demand.
Even after the worst financial downturn since the Great Depression, the aftermath of the Financial Crisis of 2008 still offered up unexpected opportunities for investors bold enough to wade through the choppy waters. One area that thrived was affordable multifamily housing that benefited from homeowners forced to downsize and midlevel renters looking to save money.
A more recent example of opportunities arising out of economic disaster can be found just two years ago during the pandemic-induced downturn. As jobs were lost and the economy retreated in the face of widespread lockdowns and social distancing, several industries soared during the downturn, including video conferencing (Zoom), online shopping (Amazon), and streaming (Netflix), and food delivery (DoorDash).
In real estate, the industrial segment soared as companies snatched up warehouses to meet online shopping and shipping demand.
“Nothing is more expensive than a missed opportunity.” – H. Jackson Brown.
Don’t miss out on the opportunities that present themselves in a potential downturn. Invest now or be prepared to invest.
Whatever you do, invest in or start a business where the demand is going and not where the attention is going. Don’t fall for the media darlings.
Pay attention to what Main Street is doing. Where is the average consumer putting their money when the wallet gets light? Attention doesn’t always translate to $$$, but demand does.