What Is Depressed?
Depressed refers to a state or condition of a market, product, currency, or security characterized by slumping prices, low volume, and lack of buyers. It usually represents a prolonged period of low prices and activity. The term may also be used in the context of the broader economy, in which case it generally refers to severely recessionary conditions.
- Depressed prices refer to an extended period where prices fall.
- Economic depressions refer to the prolonged shrinking of economic production in a country.
- Periods of depression, whether economic or related to a stock, are usually triggered by circumstances that drive demand down.
A depressed market, product, currency, or security, identified through a long-term or sustained dip in prices or economic activity, can be regional or affect the broad economy of a nation. Depressed prices can usually be found in markets after prices have run up, peaked, and subsequently declined for a prolonged period.
This decreased level of economic activity can be severe if the conditions that created this outcome persist. It is useful to make a distinction between a depressed economy and a stock with depressed prices.
Depressed conditions happen in many markets and once begun, will continue as long as demand-dampening factors remain influential. One prominent example was the U.S. housing market after the subprime real estate market bubble burst in 2006.
Excessive real estate speculation throughout the 2000s led to a housing bubble. When the bubble burst, millions of homeowners were forced into foreclosure, creating an excess supply of homes that lasted for years. In a severely depressed market, like the U.S. real estate market from 2008 to 2012, the market is defined not just by low prices, but also by low transaction volume.
A period of depressed asset prices can occur in any number of asset classes, from real estate to bonds to stocks. The global market for commodities is one market that saw a depressed movement between 2008 and 2018. The Dow Jones-UBS Commodity Index lost more than half its value, reflecting a prolonged period of oversupply and declining demand for raw materials.
In the case of stocks, a depressed stock is undervalued in comparison to other similar stocks in the same industry or market. Undervalued is a financial term referring to a security or other type of investment that is selling for a price presumed to be below the investment's true intrinsic value and may bring on bottom fishing investors and traders. These speculators think an asset's depressed price is temporary and the price will recover to become a profitable investment over time. Often they use either technical or fundamental analysis techniques to determine which assets to purchase.
Types of Depressed Markets
An economic depression is generally considered longer lasting than an economic recession. If the conditions within a country's economy create a severely decreased demand for goods and services, then a recessionary environment could occur or worsen. Several factors can create such a decrease in demand, but almost all of them contribute to a constricted ability of individuals to prosper from their labor or wisely invest or both. Circumstances such as these:
- Adverse weather conditions or events such as floods, drought, or famine
- Constrained access to credit
- High taxes, tariffs, or fees on consumption
- High levels of government and corporate corruption that destroy investor confidence
- Destruction of natural resources such as in times of war
Any of these conditions that constrain consumer demand for months will negatively impact the country's gross domestic product (GDP). If those influences are allowed to continue, the impact may not only last for a while but will severely hamper the production capacity of the country and the productivity of the individuals within it.
Individual company stocks or commodity prices may experience the same phenomenon on a smaller scale. If investors perceive a greater degree of risk in a security, they will tend to avoid it. If the perception of risk is accentuated by poor performance or unethical behavior on the part of company officers, investors will shy away from considering the stock. Over time, even if the circumstances have changed, the perception can linger, causing the stock to remain depressed: performing well enough to survive, but not attracting new investment money. The reasons for depressed commodity prices might be more complex, but the dynamic remains the same. Prices can stay low for an extended period so long as demand remains subdued.
During a depressed market, prices may remain depressed for months, if not years, depending on the extent to which investor confidence has been damaged. At times this can be related to how strongly investors had rallied beforehand. If during the times when investor confidence was high and enthusiasm was at a fever pitch, prices would rocket higher. Once the price became recognizable to nearly all investors as unsustainable and overvalued, then demand drops and prices fall. If prices fall fast and investors painfully lose more than they expected, faster than they expected, that will diminish the probability that investors will find confidence in the investment in the future.
Often the conditions which lead to the depressed market, or depressed prices, are due to activities of banking and financial crisis or the drastic change in the political structure of an area. A continued depressed market may lead to a deflationary spiral as credit confidence, production capacity, and laborer productivity all decrease in a vicious cycle. During this downward cycle, economic output slows, and demand for investment and consumption dries up. A prolonged slowdown may then lead to further declines in asset prices as producers are forced to liquidate inventories that people no longer want to buy.
Entire economies can also be depressed, the most famous case being the Great Depression, which lasted in the United States from 1929 until the start of World War II. Economic depressions are characterized by a severe and prolonged contraction of economic output in a particular economy or economies and typically lead to excess supply, lower demand, unemployment, and the bankruptcy of private businesses. These conditions are often coincident with the perception of corruption, as studies on the Corruption Perception Index (CPI) have shown.
Depressions are more severe than recessions, which are less pronounced contractions that occur as a regular feature of the business cycle. Depressions tend to include factors beyond the natural expansion and contraction of supply and demand inherent in a country's economy.
Each year, Bloomberg publishes a Misery Index that ranks nations based on levels of inflation, unemployment, and other factors. The Misery Index tends to include countries with depressed economies. Their report from August 2020 shows Venezuela, Argentina, South Africa, and Turkey as being the most depressed economies.