It doesn’t take an economy whizz to recognize the financial hardships we’re experiencing on a macro scale. This is largely due to the fact that each economic class – and therefore family – in the country has been affected by the reverberating consequences of inflation, unemployment, supply chain shortages and, of course, the pandemic. However, according to the traditional definition, the United States is not currently in a recession (this would require two consecutive quarters of general economic decline in order to qualify).
Regardless, our current economic climate is unstable at best, and presents unique issues that make it difficult to draw reasonable conclusions (or solutions) based on tried-and-true techniques or strategies. The constant doom and gloom predictions may be as disheartening as they are inevitable; simply tune into your local news channel if you’re unsure. Some are choosing to change the narrative up a bit by focusing on ways they can prepare for what’s upcoming and make improvements where applicable. The legalization effort for cannabis is undoubtedly one of them. While the medical and recreational state markets are seeing brilliant successes on an independent level, many agree a nationwide legalization would be satisfactory not only for our current financial plight but also for civilian morale and to serve as a reminder of the freedom we so readily celebrate as Americans.
CANNABIS & THE ECONOMY
A couple quick things for you to know before we fully move into the subject of the cannabis industry…. And before you throw your hands up in (justified) resistance, trust that we do not intend to droll on forever here:
First, GDP, or Gross Domestic Product, is the total income accrued by all resident producers in the economy of one country. This includes product taxes, but not subsidies already not included in the value of the product itself. Our current GDP has increased at an annual rate of 2.9% during this current (third) quarter of 2022. That’s a good thing – it means our economy is stabilizing once more.
Previous to this, the second business quarter saw a .6% decrease. Our country’s GDP is a common indicator of development and is referenced often. From 1948 until 2022, the value of the United States economy (now $21 trillion) has increased by an average of 3.14% per year. When it comes to the Federal Reserve, whom of which has issued multiple interest rate increases in the year 2022 alone, their current priority is to not trigger a legitimate recession by gradually slowing down the economy and smoothing out price hikes over time instead of letting them spike into more “drastic” levels. When asked about the likelihood of a recession, Bank of America gave a 33% estimate, while Morgan Stanley gave a 50% chance.
While you should absolutely and without a doubt use this information as a catalyst to start considering an emergency, or savings, fund (if you haven’t already), it’s also pretty important background info for understanding the cannabis market’s trends.
THE MARY JANE EFFECT
It’s true: people can feel (maybe even smell) a shift in the air. While many industries saw hardships, and cannabis companies were not without their own, most medical marijuana programs and recreational markets weathered 2020 and emerged relatively unscathed. Having been indicated as an essential health service absolutely helped.
Cannabis markets are traditionally split into two central avenues: medicinal and recreational. While they’re all incredibly unique to the state (and mandates) they’re operating under, both markets seem to be preparing for the coming “storm,” according to JPMorgan Chase CEO Jamie Dimon. He qualified this statement by calling the robust labor market and receptive consumers “bright clouds.”
Despite the tremendous growth of the cannabis market in the past decade, federal legislation has remained stagnant and out of touch with the needs of Americans. To say the numbers favor nationwide legalization would be an understatement; more than three quarters of voters indicate that they’re all for it, in fact. Economists estimate it would diminish the amount of time it would take for our economy to recover if legalized.
It’s not all sunshine and rainbows, though. In states with more mature cannabis industries, overproduction is a core concern, along with falling wholesale prices and stiff competition. This can destabilize a market enough to make things uncomfortable, both for consumers and producers. It’s important to note that federal legalization may not necessarily fix these issues, if done improperly. Another possible concern on the horizon is the resurgence of the illegal market. When everyone’s pockets are feeling the pressure, most folks will turn to the cheapest options available to them. Such is also the case with dispensary prices as compared to illicit market prices.
Leaning on past examples
It’s hard to say what the future brings, because technically we’ve never had a financial situation take place in the U.S. like the one we have presently. The Great Recession, which was also referred to as the housing crisis, started in December 2007 and continued well into 2009. The domestic economy shrank by 5.1% throughout the period.
The alleged COVID-19 recession started in February of 2020 and lasted until April of that year. Even though it lasted only a little while, it caused quite a bit of trouble. While the country was shut down, GDP dropped by 19.2 percent.
The tech boom of the ’90s came to an end in March of 2001, and the economy slid into recession for the next eight months. This was the first recession of the ’00s, and it was followed by the Great Recession in the ’00s. Economic growth fell by 0.3%, which is less than in prior recessions.
After doing the math, we see that the average length of the last three recessions is just over nine months.
The average effect was a decline of 8.2 percent in gross domestic product (GDP) revenue.
The big picture, so to speak
The cannabis world is vast, and investing in the cannabis industry has also taken off in the past several years, bringing net profits far beyond the supply chain. Many programs are focused on researching and developing the plant as much as possible, essentially finding new products and methods of consumption for consumers to be tantalized by. If a recession hits our country within the next few years, it could cause the entire industry to split into two groups: the winners, and of course, the losers.
While unfortunate for those who don’t make the cut, it will inevitably even out the performance and competition of each company that remains. This means fairer prices for patients and consumers alike, and a higher quality product overall. Some industry leaders go as far as to say that an economic downturn could end up being the straw that breaks the came’s back in order to get cannabis legalized federally.
There’s not denying that all industries are vulnerable to a potential recession. There’s also plenty of evidence to show that cannabis companies and marijuana stocks would remain amongst the most resilient during a serious economic downturn. Regardless, those who produce, manufacture and distribute will want to keep a steady eye on their portfolios and stay within the margins. Consumers can embrace the fact that cannabis companies will need to adjust their prices accordingly, too.
supply MEETS demand
Demand for both cannabis and alcohol is very consistent. Although they are not immune to economic downturns, there is much anecdotal evidence indicating that demand is inelastic. Some sectors of the economy, like the market for prescription pharmaceuticals, are inelastic, meaning that consumers will keep spending no matter what the state of the economy is. If you’ve invested in cannabis and you’re concerned about the return on your money, check out these specs.
When prices fall 20% from their most recent peaks, we refer to this as a bear market. Since the beginning of the year, the benchmark that is the S&P 500 has experienced a decline that is greater than 20% as of the close of trading on Tuesday.
As a comparison, the S&P averages a return of around 10% every year, when dividends are taken into account.
Take a look below for the cumulative results of the last five recessions:
- From March 24th, 2000, to September 21st, 2001 (546 days), the market fell 36.77 percent.
- 33.75%, January 4, 2002 – October 9, 2002 (278 days),
- 51.93% between October 9th, 2007, and November 20th, 2008 (408 days)
- From January 6th, 2009, to March 9th, 2009 (62 days), the percentage change was as follows: -27.52%
- 33.92% between February 19th, 2020, and March 23rd, 2020 (33 days)
In the average case, that equates to about 265 days.
The average portfolio would fall by -22.76% if the recession were to begin on July 1 and follow the same trajectory as the last one. Your investments should recover in two years at the market’s average historical rate of return, assuming all other conditions stay unchanged. While the cannabis industry is still in its infancy, most experts agree: it’s only up from here!
Ready, set, GROW!
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