What is Depressed
Depressed refers to a state or condition of a market, product, currency, or security characterized by slumping prices, low volumes, 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 broad economy, in which case it generally refers to severely recessionary conditions.
BREAKING DOWN Depressed
A depressed market, product, currency, or security, identified through a long-term or sustained dip in the economic activity, can be regional or affect the broad economy of a nation or the world. Depressed prices can usually be found in markets after prices have run up, peaked and subsequently declined for a prolonged period. This lower economic activity is severe and longer-lasting than would happen during times of recession. During a depressed situation, prices may remain depressed for months, if not years, depending on the extent to which they had rallied beforehand, and the amount of over-capacity or excess supply.
Often the conditions which lead to the depressed market 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. During this downward cycle, economic output slows, and demand for investment and consumption dries up. This slowdown may lead to an overall decline in asset prices as producers are forced to liquidate inventories that people no longer want to buy.
The Downward Cycle of Depressed Markets
Depressed conditions happen in many markets and once begun, will continue as the flow of funds continues to evaporate. 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 2000's 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 depressed movement between 2008 and 2018. The Dow Jones UBS Commodities Index lost more than half its value, reflecting a prolonged decline in 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.
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 Two. 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 over demand, unemployment, and bankruptcy of private businesses. They are more severe than recessions, which are less pronounced contractions that occur as a regular feature of the business cycle.
Each year, Bloomberg publishes a Misery Index where they rank nations based on levels of inflation, unemployment, and other factors. Their report from February 2018 shows Venezuela, South Africa, Argentina, and Egypt as being the most depressed economies.