Vocabulary alone won't solve all financial problems, but understanding the financial press can help you in knowing what to expect. When there is a down day - or series of days - in the stock market or overall economy, here are some terms you may see and hear in the news. Thinking through negative potential scenarios could help you evaluate your financial strategy.
A downturn is pretty much what it sounds like it might be. It's a decline and could apply to one of the investment markets or to the economy in general.
Slowdown is a term that's sometimes applied to the economy or a sector of the economy. For instance, if the number of jobs created in one quarter is less than the number of jobs created in the previous quarter or the previous year, economists and the financial press might talk about a slowdown in jobs creation. It doesn't necessarily mean that jobs are being lost, just that the number of new jobs isn't growing as fast. Since growth can't be robust forever and must eventually reach a more sustainable level, a slowdown isn't necessarily bad news.
Often the stock market is said to be a bear market or a bull market. A bear market is one in which stock prices are falling, with anticipation of continued decline in prices. A bull market is when stock prices are generally rising. To remember which is which, think of how bears and bulls each fight. Bears claw down with their front paws as part of how they attack. A bull will swing up with his horns.
A recession is two consecutive quarters of decline in gross domestic product, which is basically everything all the people and companies in the country produce. While a recession doesn't include investment markets specifically in the basic definition, the stock market is also generally in decline during a recession. A depression is when the national decline in the economy and investment markets of a country are in decline over an extended period of time. There is an old joke about the difference between a recession and a depression. A recession is when your neighbor loses a job. A depression is when you lose your job.
Why should you care about any of this? Because thinking through the different types of negative economic circumstances can help you decide whether your financial strategies and investment allocation are right for you. If your existing strategy wouldn't help you get through a loss of your job and give you enough time to look for a good job, then you're not positioned well if a slowdown or recession impacts you directly. If you're on the verge of retirement and you don't have sufficient amounts in stable investments - cash, certificates of deposit, fixed income holdings - to meet your expenses for three to five years, consider changing your strategy.
Linda Leitz is a certified financial planner and can be reached at email@example.com.