As a new pilot I was taught that all weather on earth is caused by the uneven heating of the earth’s surface by the sun. This uneven heating causes moisture to rise and fall and air to move. As this happens, energy from the sun is distributed unevenly around the globe which, at times gets concentrated in certain areas. If the concentration becomes too severe, storms will result. We witnessed this effect with the severe storm that hit Florida this week.
During the warm season it is very common for powerful storms to build up over the Atlantic Ocean which then make their way to the mainland. As they cross land they begin to release their energy in the form of heavy rain, winds and even tornadoes. Each of these severe events have the potential to cause serious localized damage. But what they also do is allow the energy of the storm to dissipate, eventually resulting in the period of calm that follows major weather events.
This week the investing markets also felt a little bit stormy at times. Stocks fell dramatically for a few days and analysts were suddenly talking again about the risk of another recession. Some fear recessions but I have always considered them to be somewhat of the economic version of a passing summer storm.
Just as an Atlantic hurricane begins when warm sunny days lead to a buildup of an excessive amount of energy, you might say that a recession is the result of a similar series of events. During good “sunny” times investors, businesses and even governments can get a little careless with the way they manage financial resources. As people feel more confident in the economy they tend to spend more, borrow more and perhaps exercise a little less caution. Forgetting how cold the economic winters can be, these entities start living above their means and making more aggressive financial moves.
At some point the economy becomes unbalanced as spending, personal, business and government, exceeds revenue. This also leads to stock and real estate prices growing faster than is reasonable. Like a summer storm that has created a meteorological imbalance, poor financial decisions can create an economic imbalance. At some point the energy is too great and something has to give.
Recessions are feared by some but are not necessarily a bad thing. As the summer storm reaching land provides the opportunity to release built up energy and return balance to nature, so the recession can bring better balance to the economy. It slows down unreasonable growth and spending, lowers stock and real estate prices, and can reduce interest rates. The process can be painful, but it is usually short-lived, and generally followed by a period of calm, opening the way for the next cycle of growth and opportunity.
So far, in America, we have a 100% success rate at surviving, and growing from, every recession. With such an amazing track record we should view a recessionary cycle as a welcomed, short-term storm, to bring some balance back to our economy and offer the opportunity to invest for coming growth.
Dan Wyson, CFP® is a long running national financial columnist, author of several books and CEO/Founder of Wyson Financial/Wealth Management 375 E. Riverside Dr. St. George, UT 84790 – 435-986-9525 Securities and Advisory services offered through Commonwealth Financial Network, member FINRA/SIPC, a registered investment advisor.
