There is an old saying that goes, “Things will get worse before they get better.”

Despite news outlets that constantly tout recovery, many think that the health of the economy is getting worse. Then there are others who may not have such a dire view, but still fear the possibility of a “double-dip” recession.

It is equally important for investors and business owners to cautiously approach deals and investments, while focusing on current events and their greater meaning for the market.

Between the government shutdown and Twitter’s IPO, investors in the United States are very driven to gain a profit, but seem to feel lukewarm at most about recent events.

Although Twitter filed for a $1 billion Initial Public Offering, Twitter remains unprofitable. Yet, ironically, many are anxiously waiting to purchase this stock when it is available.

According to the Associated Press, in the week of Oct. 4, during the ongoing government shutdown, “Two stocks rose for every one that fell on the New York Stock Exchange.” Investors are desperate to profit, despite the dire state of the government and business.

Now, of course, there is always the possibility that as the stalemate in Congress drags on, people start to wake up. If this happens, there will definitely be a bigger dip in the markets as people run to safety. But there is a scarier scenario that looms over the country — the possibility of a bubble.

When prices surge, bubbles form. However, all bubbles do burst.

During the height of the recession, everything seemed to stop. People got laid off, business dried up, stocks plummeted, corporate coupons and treasury yields all went down.

After such a long period of negative to stagnate growth, everyone is looking to somehow get a profit, as seen with Twitter’s IPO and the rise in stocks during the government shutdown.

Businesses and banks have been hoarding cash. It is only a matter of time before they spend it. While this in itself does not make a bubble, the stage is being set.

The recession bred a higher degree of risk-aversion in pursuing new business ventures. However, too much uncharacteristic caution makes people adjust quickly in the opposite direction.

For example, imagine a midsize company that had to lay off several employees to stay profitable. During the course of the recession, this same business made sure to save the maximum profits instead of reinvesting in the business.

Now, as the markets start to come back to life, the business may take more risks. If everyone else is starting too well, the owner may be more inclined to spend perhaps even more than they would have prerecession.

Their justification could be fueled by the need to make up for those “lost” returns or simply a mindset that reminds them that they have put away more cash than in the past, so they can take a few liberties. For publicly traded companies, the investors will surely encourage this.

But it can be argued that even though things may appear to be business as usual, it is important to be just as even-headed in decision-making processes.

Business is cyclical, which means there will always be upswings and downswings. However, after having a particularly deep downswing, business owners cannot afford to be reckless. If there is a bubble so quickly after recovery, there is a strong possibility that we will fall back into a greater recession.

If so, the same trick of monetary easing will not work. There is only so much depreciating the dollar can take. What needs to happen to get this country back on to the stage of growth is simple: smarter investors and smarter business owners.
After all, man learns from history that man learns nothing from history.

Fran Walker is a senior finance and accounting major. Her column appears weekly. She can be reached at fwalke01@syr.edu.

Published on October 7, 2013 at 12:52 am