Unit 1 · Level 2 · The business cycle
When winter comes
On a chart, a recession is a red number. On the ground, it's millions of real people losing jobs, companies watching profits evaporate, and portfolios shrinking fast. In 2008-09 the global financial crisis threw tens of millions out of work worldwide. Pretending downturns are painless is how people end up unprepared for them.
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What you get asked
During the 2008-09 recession, US unemployment roughly:
It climbed from about 5% to 10%, roughly one worker in ten. Severe, though still far from the Great Depression's ~25%. Eurozone unemployment later peaked around 12% in 2013.
From late 2007 to March 2009, the S&P 500 fell roughly ___ from its peak.
Peak to trough, the index lost about 57%. That's what a deep recession plus a banking crisis can do. It's also why 'stocks always go up' needs the words 'eventually, if you can hold on'.
Match what a recession typically does to each
The damage spreads through everything at once: fewer sales mean lower profits, which mean layoffs, which mean even fewer sales. That feedback loop is why recessions feel so heavy.
You had €10,000 in an S&P 500 tracker at the October 2007 peak. The index then fell 57%. Roughly what was your stake worth at the March 2009 bottom, in euros?
€10,000 × (1 − 0.57) = €4,300. Brutal, yet investors who kept holding (and kept buying) were made whole within a few years. Selling at the bottom was the one move with no comeback.
In 2009 stocks bottomed in March, but US unemployment kept rising until October. The lesson?
Markets price the future, so they bottom while the news is still terrible. Waiting for the economy to 'feel safe' again usually means missing the strongest part of the rebound. 🐜
The rest of this unit
Learn the economy's heartbeat: expansion, peak, recession, recovery.