3 Lessons from Past Economic Recessions Amid U.S. Market Slump
By Trish DaCosta
Economists, analysts, Wall Street, and federal officials all have their eye on one thing: a looming recession predicted to occur by the end of the year. A combination of high inflation, interest rate hikes, layoffs and most recently, a market slump and cryptocurrency crash, is sending shockwaves among the investing community.
Historically, markets have experienced major highs and lows since the Great Depression. Investors tend to fall into two camps during times of fear. One, those who panic and sell off assets in response to unfavorable market conditions or two; those who hold steady, buy the dip, and hang on for dear life.
Depending on who you ask, both strategies work, but the latter camp fares better when the economy recovers. Still, it’s important to note that while this isn’t investment advice, we can look back into past recessions to learn that with every market downturn, new sectors and investment opportunities emerge.
1990s: The Tech Bubble Goes ‘Boom!’
The tech industry’s big boom began around the time that Internet access and computers became more accessible to U.S. households. A number of new tech, eCommerce, and web companies emerged as a result, grabbing the attention and dollars from venture capitalists and institutional and retail investors eager to get a slice of the pie. At the time, job demand in this sector was at an all time high - employment grew 36% between 1990-2000 - while market conditions led to a bull run that inevitably collapsed in 2001.
Dot com startups went belly up, eCommerce companies like NorthPoint Communications, Pets.com and Worldcom closed their doors permanently, and the market panicked. The NASDAQ plummeted by 75% between March 2000 and October 2002 resulting in estimated investor losses of $5 trillion.
The U.S. economy was badly shaken at the time, but not all was lost. A majority of tech companies did survive. Amazon, eBay, Cisco, Intuit, and Oracle, to name a few, bounced back and are well-known conglomerates today. Investors who avoided a knee jerk reaction to the dot com bubble likely benefited from the ground floor stock prices of the time. As we now know, these tech companies adapted to the times, survived, and thrived - proving that the adage, “buy low and sell high” is still among the best investment strategies today.
2007-2009: The Roof Topples on the Great Recession
The economic downturn known as the Great Recession brought the U.S. housing and global financial markets to near collapse during the mid-2000s. It is considered one of the worst economic crises since the Great Depression that left millions of Americans underwater. History.com notes that “over the course of the Great Recession, the net worth of American households and non-profits declined by more than 20% from a high of $69 trillion in the fall of 2007 to $55 trillion in the spring of 2009—a loss of some $14 trillion.” Additionally, financial firms were left in such disarray they required bailouts from the Federal Reserve.
The ripple effects of the Great Recession led to significant reform in banking and financial regulation that are still in effect today:
The Dodd-Frank Act of 2010 - This act imposed rigorous oversight and compliance standards for banks and financial institutions that could pose a risk to the larger U.S. economy. The provisions also gave the Federal Reserve greater scrutiny and oversight responsibilities over financial firms. One of the most important provisions - the “living will” requirement - acts like a stress test for large banks. Each year, banks are required to document how they will save themselves from collapse without government intervention again.
Bureau of Consumer Financial Protection - Dodd-Frank established a new agency designed to shield taxpayers from malpractice and abuse. During the housing crisis, it was taxpayers that funded government bailouts of the “too big to fail” banks and financial firms. The bureau has the power to enforce and regulate transactions and prevent predatory practices among consumers.
The economic downturn paved the way for greater innovation from then-startups such as Uber, Airbnb, Square and Venmo. As these companies grew, more and more competitors cropped up, creating a new sector of disruptive technologies within the mobile payments, transportation, and housing industries. Today, a majority of these companies continue to make their mark in our everyday lives and have steadily grown in size, influence, and capital.
Now: Crypto’s Epic Rise, Fall and Comeback
Undoubtedly, the current economic environment parallels recession fears from 20 years ago. After a two-year (and running) global pandemic and one of the longest market bull runs in history, it appears the economy is self-correcting - again. This time, it’s with cryptocurrency versus internet companies. Cryptocurrency’s massive boom finally reached its peak at a total market cap increase of 187.5%. It’s also created a number of new sectors, innovations, and regulatory concerns. Despite its known volatility, mainstream businesses, governments, and financial companies are eager to invest in crypto.
Those who fear another potential bubble is about to burst must also remember that volatility was a big part of internet businesses in the early days, too. The most recent crypto crash might signal collapse for this sector but it’s unlikely a permanent one. In fact, investors who follow the “buy the dip and hold” strategy are likely going to benefit in the long-run much like investors did with eBay, Amazon, and tech companies from the dot.com era. The cryptocurrency industry is ripe with innovation and opportunity, but it’s also an unpredictable market in need of regulatory clarity and protections if it will survive the next 10 to 20 years.
There’s Always an Opportunity Waiting
Media headlines have a tendency to spark fear, doom, and gloom about a failing economy, but if you’re looking objectively at historical data, economic tumbles have a way of self-correcting and creating new investment opportunities. Take for instance the start of the pandemic in March 2020. The stock market saw a massive dip and then had one of its best years. Companies like Zoom, Peloton, GrubHub, and Amazon did considerably well (nevermind Peloton’s sharp decline later in 2022), while new sectors in home fitness, remote work technology, health, and fintech have emerged.