Financial Recession in Stock Markets

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<ul><li><p>8/9/2019 Financial Recession in Stock Markets</p><p> 1/68</p><p>PROJECT REPORT</p><p>ON</p><p>FINANCIAL</p><p>RECESSION IN STOCK</p><p>MARKETS</p><p>SUBMITTED BY :</p><p>SANDEEP CHOPRA</p><p>USM</p><p>KURUKSHETRA UNIVERSITY</p><p>1</p></li><li><p>8/9/2019 Financial Recession in Stock Markets</p><p> 2/68</p><p>Introduction</p><p>What Is Economic Recession</p><p>When GDP growth is negative for two consecutive quarters or more. For all</p><p>practical purposes though, a recession starts when there are several quarters of</p><p>slowing but still positive growth. The first quarter of negative growth in a recession</p><p>cycle is often followed by positive growth for several quarters, and then another</p><p>quarter.of.negative.growth.</p><p>This definition is somewhat unpopular with many economists as it does not take into</p><p>consideration changes in other economic variables such as current unemployment</p><p>rates.or.consumer.confidence.and.spending.levels.</p><p>The official agency in charge of declaring that the economy is in a state of recession</p><p>is the NATIONAL BUREAU OF ECONOMIC RESEARCH (NBER). NBER'S</p><p>defines recession as a "significant decline in economic activity lasting more than a</p><p>few months" For this reason, the official designation of recession may not come</p><p>until.after.we.have.been.in.one.for.as.ubstantial.amount.of.time.</p><p>It is actually quite natural for countries to experience mild economic recessions. This</p><p>is a built-in factor of a society economic cycle as spending and consumption are</p><p>going.to.increase.and.decrease.along.with.prices.</p><p>2</p></li><li><p>8/9/2019 Financial Recession in Stock Markets</p><p> 3/68</p><p>Rarely, experiencing many of these factors simultaneously can evoke deep</p><p>economic recession or depression</p><p>Definition of Recession</p><p>Recession is not to be confused with depression. Recession means a slow down or</p><p>slump or temporary collapse of a business activity. In its early stage it can be</p><p>controlled in a methodical manner. Experience helps to avert total collapse.</p><p>Unchecked, it leads to severe depression. Depression is a dead end. It is time to close</p><p>shop completely. It is a total state of irrevocable economic failure. When a country is</p><p>doing well all round its Gross Domestic Product (GDP) is on the rise.</p><p>Overall economy is bullish; it is not only the stock exchanges that tell riches to rags</p><p>stories but even small businesses. It all adds to the national exchequer. An economist</p><p>is likely to give a detailed, comprehensive definition of recession. But for the</p><p>layman who has been affected knows it only one way-when he loses his job and has</p><p>no money to pay his credit and loans. Recession is when the consumer faces</p><p>foreclosure and the banker comes knocking for his pound (or dollar) of flesh. Many</p><p>companies and whole countries go bankrupt for want of liquid funds and cash flow</p><p>for.even.daily.requirements.</p><p>If you look at it from the point of view of a businessman, recession is a transitory</p><p>phase. The Business Cycle Dating Committee of the National Bureau of Economic</p><p>Research has another definition. It profiles the businesses that have peaked with</p><p>their activity in one season and it falls naturally in the next season. It regains its</p><p>original position with new products or sales and continues to expand. This revival</p><p>makes the recession a mild phase that large companies tolerate. As the fiscal position</p><p>rises, there is no reason to worry. Recession can last up to a year. When it happens</p><p>3</p></li><li><p>8/9/2019 Financial Recession in Stock Markets</p><p> 4/68</p><p>year.after.year.then.it.is.serious.</p><p>Are we facing a recession or not? Yes, for the simple reason that not only our</p><p>neighbors but our friends are unemployed. There is less of business talk and more</p><p> billing worries. Transitory recessions are good for the economy, as it tends to</p><p>stabilize the prices. It allows run away bullish companies to slow down and take</p><p>stock. There is a saying, when its tough the tough get going. The weaker</p><p>companies will not survive the brief recession also. Stronger companies will pull</p><p>through its resources. So when is it time to worry? When you are facing a</p><p>foreclosure, when the chips are down and out and creditors file cases for recovery.</p><p>4</p></li><li><p>8/9/2019 Financial Recession in Stock Markets</p><p> 5/68</p><p>What Is Stock Market</p><p>A stock exchange is a corporation ormutual organization which provides "trading"</p><p>facilities for stock brokers and traders, to trade stocks and other securities. Stock</p><p>exchanges also provide facilities for the issue and redemption of securities as well as</p><p>other financial instruments and capital events including the payment of income and</p><p>dividends. The securities traded on a stock exchange include: shares issued by</p><p>companies, unit trusts, derivatives, pooled investment products and bonds. To be</p><p>able to trade a security on a certain stock exchange, it has to be listed there. Usually</p><p>there is a central location at least for recordkeeping, but trade is less and less linked</p><p>to such a physical place, as modern markets are electronic networks, which gives</p><p>them advantages of speed and cost of transactions. Trade on an exchange is by</p><p>members only. The initial offering of stocks and bonds to investors is by definition</p><p>done in theprimary market and subsequent trading is done in the secondary market.</p><p>A stock exchange is often the most important component of a stock market. Supply</p><p>and demand in stock markets is driven by various factors which, as in all free</p><p>markets, affect the price of stocks.</p><p>There is usually no compulsion to issue stock via the stock exchange itself, nor must</p><p>stock be subsequently traded on the exchange. Such trading is said to be off</p><p>exchange orover-the-counter. This is the usual way that derivatives andbonds are</p><p>traded. Increasingly, stock exchanges are part of a global market for securities.</p><p>5</p>http://en.wikipedia.org/wiki/Corporationhttp://en.wikipedia.org/wiki/Mutual_organizationhttp://en.wikipedia.org/wiki/Stock_brokerhttp://en.wikipedia.org/wiki/Trader_(finance)http://en.wikipedia.org/wiki/Stockhttp://en.wikipedia.org/wiki/Security_(finance)http://en.wikipedia.org/wiki/Dividendhttp://en.wikipedia.org/wiki/Shareshttp://en.wikipedia.org/wiki/Unit_trusthttp://en.wikipedia.org/wiki/Derivativeshttp://en.wikipedia.org/wiki/Bond_(finance)http://en.wikipedia.org/wiki/Electronic_networkshttp://en.wikipedia.org/wiki/Investorhttp://en.wikipedia.org/wiki/Primary_markethttp://en.wikipedia.org/wiki/Secondary_markethttp://en.wikipedia.org/wiki/Stock_markethttp://en.wikipedia.org/wiki/Free_markethttp://en.wikipedia.org/wiki/Free_markethttp://en.wikipedia.org/wiki/Over-the-counter_(finance)http://en.wikipedia.org/wiki/Derivativeshttp://en.wikipedia.org/wiki/Bond_(finance)http://en.wikipedia.org/wiki/Corporationhttp://en.wikipedia.org/wiki/Mutual_organizationhttp://en.wikipedia.org/wiki/Stock_brokerhttp://en.wikipedia.org/wiki/Trader_(finance)http://en.wikipedia.org/wiki/Stockhttp://en.wikipedia.org/wiki/Security_(finance)http://en.wikipedia.org/wiki/Dividendhttp://en.wikipedia.org/wiki/Shareshttp://en.wikipedia.org/wiki/Unit_trusthttp://en.wikipedia.org/wiki/Derivativeshttp://en.wikipedia.org/wiki/Bond_(finance)http://en.wikipedia.org/wiki/Electronic_networkshttp://en.wikipedia.org/wiki/Investorhttp://en.wikipedia.org/wiki/Primary_markethttp://en.wikipedia.org/wiki/Secondary_markethttp://en.wikipedia.org/wiki/Stock_markethttp://en.wikipedia.org/wiki/Free_markethttp://en.wikipedia.org/wiki/Free_markethttp://en.wikipedia.org/wiki/Over-the-counter_(finance)http://en.wikipedia.org/wiki/Derivativeshttp://en.wikipedia.org/wiki/Bond_(finance)</li><li><p>8/9/2019 Financial Recession in Stock Markets</p><p> 6/68</p><p>The World's Top 15 Stock Exchanges by Domestic Market</p><p>Capitalization (2007):</p><p>Rank Exchange Name Country</p><p>Domestic Market</p><p>Capitalization</p><p>(in $ bn)</p><p>1 New York Stock Exchange United States 11,837</p><p>2 Tokyo Stock Exchange Japan 3,306</p><p>3 NASDAQ United States 3,239</p><p>4 Euro nextBelgium, France,</p><p>Holland, Portugal2,869</p><p>5 London Stock Exchange United Kingdom 2,796</p><p>6 Shanghai Stock Exchange China 2,704</p><p>7 Hong Kong Stock Exchange Hong Kong 2,345</p><p>8 Toronto Stock Exchange Canada 1,608</p><p>9 BM&amp;FBovespa Brazil 1,337</p><p>10 Bombay Stock Exchange India 1,306</p><p>11 BME Spanish Exchanges Spain 1,297</p><p>12 Frankfurt Stock Exchange</p><p>Germany 1,292</p><p>13 Australian Securities Exchange Australia 1,261</p><p>14 National Stock Exchange of India India 1,224</p><p>15 SWX Swiss Exchange Switzerland 1,064</p><p>Review of Literature</p><p>6</p>http://www.wikinvest.com/wiki/New_York_Stock_Exchangehttp://www.wikinvest.com/wiki/Tokyo_Stock_Exchangehttp://www.wikinvest.com/wiki/NASDAQhttp://www.wikinvest.com/wiki/Euronexthttp://www.wikinvest.com/wiki/London_Stock_Exchangehttp://www.wikinvest.com/wiki/Shanghai_Stock_Exchangehttp://www.wikinvest.com/wiki/Hong_Kong_Stock_Exchangehttp://www.wikinvest.com/wiki/Toronto_Stock_Exchangehttp://www.wikinvest.com/wiki/BM%26FBovespahttp://www.wikinvest.com/wiki/Bombay_Stock_Exchangehttp://www.wikinvest.com/wiki/BME_Spanish_Exchanges?action=edithttp://www.wikinvest.com/wiki/Frankfurt_Stock_Exchangehttp://www.wikinvest.com/wiki/Australian_Securities_Exchangehttp://www.wikinvest.com/wiki/SWX_Swiss_Exchangehttp://www.wikinvest.com/wiki/New_York_Stock_Exchangehttp://www.wikinvest.com/wiki/Tokyo_Stock_Exchangehttp://www.wikinvest.com/wiki/NASDAQhttp://www.wikinvest.com/wiki/Euronexthttp://www.wikinvest.com/wiki/London_Stock_Exchangehttp://www.wikinvest.com/wiki/Shanghai_Stock_Exchangehttp://www.wikinvest.com/wiki/Hong_Kong_Stock_Exchangehttp://www.wikinvest.com/wiki/Toronto_Stock_Exchangehttp://www.wikinvest.com/wiki/BM%26FBovespahttp://www.wikinvest.com/wiki/Bombay_Stock_Exchangehttp://www.wikinvest.com/wiki/BME_Spanish_Exchanges?action=edithttp://www.wikinvest.com/wiki/Frankfurt_Stock_Exchangehttp://www.wikinvest.com/wiki/Australian_Securities_Exchangehttp://www.wikinvest.com/wiki/SWX_Swiss_Exchange</li><li><p>8/9/2019 Financial Recession in Stock Markets</p><p> 7/68</p><p>History of Recession</p><p>Since history seems to repeat itself, maybe we could learn something about the</p><p>current possible recession by studying the world recession history.</p><p>The markets moves in approximately 15 year cycles. The market goes up for 15</p><p>years then seems to go sideways for the next 15 years. This growth &amp; then</p><p>consolidation pattern happens frequently through out history.</p><p>Let's first consider the Dow Industrials index from 1930 through 1945.</p><p>This period started with the great depression. We all know the effect the depression</p><p>had on stock values. The Dow lost over 88% of its value between 1929 and 1933. It</p><p>made a nice rebound following the depression. It increased 345% over the next 4</p><p>years. We will see there is a theme in the recession / expansion cycle. Recessions are</p><p>relatively short and can be very violent to investors in the stock market. The</p><p>expansion period following recessions are much longer and historically quite good.</p><p>One thing you need to be extremely aware of. Numbers and percentages can be</p><p>deceiving. We just mentioned that the index lost 88 percent, but then gained 345%.</p><p>Sounds like you made up all your losses and then some. Not quite.</p><p>The dirty little secret to investment losses is this: if anybody loses 50% of his</p><p>portfolio, then it needs to make 100% just to break even. This is an ugly little fact,</p><p>but lets looks at it in real life. If someone had $100,000 and lost 50%, he would beleft with only $50,000. How much do you have to earn on your $50,000 to get back</p><p>to even? You need to earn another $50,000. This is 100% of what you currently</p><p>have. You lost 50% and must gain 100% just to break even.</p><p>7</p></li><li><p>8/9/2019 Financial Recession in Stock Markets</p><p> 8/68</p><p>Now that some of the back ground work is complete lets look at the next 15 years,</p><p>from 1945 through 1960. In 1955 the Dow finally got back to where it was before</p><p>the great depression. This was a very long 25 year wait. Imagine the poor retirees</p><p>that retired before the depression and never again regained their original portfolio</p><p>value!</p><p>The last 15 years were mostly down then sideways (1930 through 1945). The next</p><p>15 year time period (1945 thru 1960) had very mild recessions with the worst only</p><p>causing a 15% drop in the Dow. Overall, the Dow gained 267% over these 15 years.</p><p>This is very good reward for a minimum amount of risk. This leads us to the next 15</p><p>years, 1960 to 1975.</p><p>The 15 year cycle is definitely in effect. The last 15 years were very tame yet had a</p><p>nice return. These 15 years were not for the feint of heart. Gain was very little over</p><p>the period, but volatility was killer. The period started out with a wonderful 75%</p><p>gain, but gave it all back by the end. The recessionary periods were very violent. The</p><p>reward available in this market was much smaller than the risk. It would have been</p><p>nearly impossible to be a buy and hold investor and have stayed with the market.</p><p>Thus far, we had a 15 year period that was horrible (1930-1945), one that was very</p><p>nice (1945-1960), then another horrible one (1960-1975). Without looking ahead,</p><p>we might guess that the next 15 year time period would be another nice one. The</p><p>market consolidated over the last 15 years and should be ready to move ahead again.</p><p>This period began with a 6 years of continued consolidation (going sideways), but</p><p>when it was done consolidating, it moved up very nicely. It moved from around 800</p><p>in 1982 to 2800 by 1990. This represents a 250% increase for the period. The</p><p>volatility for the period was pretty tame, at least if you look at the volatility caused</p><p>8</p></li><li><p>8/9/2019 Financial Recession in Stock Markets</p><p> 9/68</p><p>by recession. The largest pullback in value was the 1981 to 1982 recession which</p><p>was about 18%. There was a large pullback in August of 1987 of about 30%, but</p><p>wasn't caused by recession and didn't take that long to be regained; all in all a very</p><p>fruitful 15 years.</p><p>This would lead to believe that the next 15 years (1990 thru 2005) would be</p><p>tumultuous again as the market needs to digest its gains.</p><p>The roll the market had going continued for the first half of this period. It gained</p><p>300% in just 8 years. This was more in the first half than the others gained in their</p><p>entire 15 year period. This didn't go un-noticed however, and the market promptlytook back a healthy 35% through the next recessionary period. It took until mid way</p><p>through 2006 to finally get back to even from the highs seen in 1999. Once this was</p><p>achieved, however, the Dow just kept going. It extended its gains through the</p><p>expansion period, hitting new highs once again.</p><p>This brings us to today. There is much talk about the beginning of another recession.</p><p>We're at the end of a period that should have shown consolidation, but instead had</p><p>another large run up. This run up wasn't without sizeable volatility. We've just</p><p>broken a long term support line. I've drawn support lines through the years following</p><p>recessions and had you sold when the support line was broken, you would have been</p><p>saved a lot of grief during the next recession.</p><p>In summary, It would be said that the recession history points to our next recession</p><p>causing havoc on the Dow and the global stock markets. When will the next</p><p>recession be or are we already in it?</p><p>Objective &amp; Scope of Study</p><p>9</p></li><li><p>8/9/2019 Financial Recession in Stock Markets</p><p> 10/68</p><p>The primary objective would be:-</p><p> To st...</p></li></ul>