The Bear and the Recession vs. The Chicken and the Egg
By Steve Ciaccio
Does a bear market cause a recession, or does a recession cause a bear market? First of all, let’s talk about what the terms “bear market” and “bull market” mean, then we can move on to how they relate to economic reality.
I don’t think that anyone is completely sure of how bear and bull markets got their names. The explanation that was given to me years ago was that downward markets are named after the bear because bears strike with a downward swipe of their claws. Upward markets are named after bulls because bulls strike upward with their horns.
The stock market usually trends downward months before a recession begins, and it usually trends upward months before an economic recovery begins. The reasons are several. One reason is that investors use economic indicators to measure and predict the economy. For example, if you know that new orders for manufactured goods have increased or decreased, then you have a pretty good picture of whether factories will be adding or laying-off workers. When combined with other factors, the amount of new orders also hints at whether or not factories will be buying raw material, and so on. Another indicator, new building permits give insight into future activity in the housing industry. There are many economic indicators, each with a view of its own corner of the economy.
Ironically, although the anticipation of a recession can cause a bear market to happen months in advance of an economic slowdown, it is also true that when a bear market happens, it can help cause a recession. When the stock market drops and people see their retirement savings lose value, they feel less wealthy. They sometimes cut back on the use of everyday goods like gas and restaurant food. They also tend to postpone larger purchases like cars, room additions, and moving into larger houses. The bear market causes a slowdown in spending, which then helps cause a recession.
In other words, bear markets happen because investors believe that a recession is coming. However, when bear markets happen, they can partially be the cause of the recession.
So, now we do know which causes which. It was the chicken.
…or was it the egg?
Steve Ciaccio, MBA, CPA, is a Financial Consultant with Ciaccio Wealth Management, Ltd. in Batavia, IL. He can be reached at 630-454-4599 and at www.CiaccioWealth.com email: Steve.Ciaccio@LPL. com
The opinions voiced in this material are general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment strategies may be appropriate for you, consult your financial advisor prior to investing. Steve Ciaccio is a registered representative with and securities offered through LPL Financial. Member FINRA/ SIPC. The LPL Financial registered representative associated with this page may only discuss business and/or transact business with residents of Colorado, Florida, Illinois, Minnesota, North Carolina, and Wisconsin.
Copyright Steve Ciaccio 2011