Trends Magazine - June 11, 2009

How the Recession Is Preparing Us for the Future

More than 2,000 years ago, the Stoic philosophers observed that an enlightened person always finds a way to turn misfortune into opportunity.  That is no less true today.  The fact is, even while the headlines are screaming about a financial crisis, the economies of the United States and the world are laying the foundations for the creation of vast new wealth.  Strong companies with enlightened leadership, as well as individual professionals and investors, will be able to deploy strategies that ensure they make the best use of their resources now, and then participate in the boom times when they come. 

As recently highlighted in the McKinsey Quarterly, timing is of the utmost importance in making the most of crises.  There are some once-in-a-lifetime opportunities out there, and one looming question is when to seize them.  Moving too soon could mean incurring further losses, while waiting could mean missing the opportunities altogether.  This is especially true of companies considering an acquisition or a merger. 

The short answer seems to be that moving sooner rather than later is more likely to optimize value than waiting for a positively defined bottom.  It’s important to remember that when recessions have ended in the past, the stock market has rebounded by 50 percent to 130 percent over the subsequent two years.  That suggests a need to move quickly.

In an analysis done for the McKinsey Quarterly article, several scenarios were analyzed for possibilities of timing the bottom of the recession.  It turned out that only perfect timing would result in better value than investing now, even if the market were to decline another 20 percent in the next six months.  This would hold true for investing in stocks, for increasing research and development, or for acquiring an existing company.

What is the likelihood of such a decline at this point?  The authors noted that the time it took to reach the bottom of a recession historically was about 27 months on average, while there was an average of six bear market rallies in those downturns.  There have been five bear market rallies since the beginning of the present recession.

The Business Cycle Dating Committee of the National Bureau of Economic Research, which keeps track of the beginning and ending dates of recessions in the U.S., determined that this recession began in December 2007, marked by the peak in economic activity that began in late 2001.  So the bottom of the recession should occur within the next few months — if it hasn’t occurred already. 

Of course, inept action or inaction by the government can always deepen or prolong a recession, as it did in the Great Depression.

In any event, the future rests on restoring confidence, which is the driving force in any economy, whether it involves consumers, companies, investors, or lenders.  A key element of restoring confidence is restoring the flow of credit so that companies can function.  During the Great Depression, investment by corporations dropped by more than 75 percent.

For more in-depth analysis of what this means to you, click here.