The Impact of Market Cycles on Charitable Giving

Market volatility and charitable contributions are closely connected. Private donations, corporate giving, and donor-advised funds make decisions based on market cycles and in anticipation of long-term market trends. Giving always matters, but the financial incentive to support nonprofits isn’t static.

Bear and bull markets, market cycle timing, planned giving strategies in varying market conditions; they’re terms organizations like Norte Youth Cycling have had to embrace to stay financially secure and make smart decisions on behalf of our supporters and the thousands of families who enjoy our programs.

What Is a Market Cycle?

Market cycles, sometimes referred to as economic cycles, are a long-term pattern of economic activity that repeats over time. The traditional market cycle includes a period of aggregation, value creation, distribution, and a mark-down phase. The timeframe for market cycles varies by scope; some industries have shorter market cycles, including commodity markets that experience seasonal input cost volatility or increased exposure to geopolitical factors, just as wheat or eggs.

The Four Stages of a Market Cycle

While economists use slightly different terms for the four stages of a market cycle, the characteristics of each stage are universal. Unfortunately for businesses, traders, economists, and nonprofits, identifying these stages before they happen isn’t easy. Even market professionals and complex algorithms fail to anticipate the peaks and troughs of a market cycle or when extreme positions will change again.

Accumulation

A market cycle starts (or restarts, as it were) in the accumulation phase. The market is at the lowest point of the trough; it has bottomed out. In many cases, it takes the introduction of a new incentive to restart. This may be an exciting new technology, substantial investment from risk-tolerant businesses or governments, or geopolitical events that illustrate new opportunities for growth. Prices are low, sentiment is negative, and businesses are operating on thin operating margins.

Mark-up

During the mark-up phase, the market has regained a degree of stability, typically identified by increased stock (or product) price and trade volume. This encourages more investment from a wider range of individuals and increased investment by established institutions. As prices rise, more late-stage investment chases prices toward the upper end of forecast price targets.

Near the end of the mark-up phase, early investors start to unwind their position. This profit-taking often signals the end of the mark-up phase, but the funds pulled pose important tax considerations for those unloading positions. We’ll get back to this shortly.

Distribution

Prices stabilize and aggregate buying slowly turns to sell-heavy market conditions. While many investors are still buying stocks, they are more likely to be smaller sums held for shorter periods. Overall market sentiment cools during the distribution phase, and while there many firms continue to gain, market fluctuations may cause wider uncertainty.

Mark-down

At some point, the market slows and sellers begin to outnumber buyers. The mark-down phase can last weeks, months, or years. A sustained, gradual mark-down period is often referred to as a bear market. Not all mark-down periods result in bear markets or a recession. While economics can get a little hazy on precise definitions, these market conditions have some generally agreed-upon characteristics.

Bear Market vs. Recession

A bear market is a long-run decline in market prices of 20% or more. The decline must last several months; a few rough days isn’t a bear market. Bear markets are related to stocks, bonds, and other financial products.

A recession is a long-term negative decline in a broader economy or industry-wide performance. A country may be in a recession if it records two consecutive quarters of decline in a metric like Gross Domestic Product (GDP). Specific industries may also experience recessions, such as the housing market when home sales decline or the auto industry when consumers purchase fewer new cars.

Related: How Recessions Impact Nonprofits

Charitable Giving and Economic Cycles

We know that market cycles influence charitable giving from all sources. Philanthropy in different market phases varies and changes household, corporate, and foundation gifts, especially during the critical year-end period for nonprofits.

Donor Resilience Across Market Cycles

There’s good news. Studies largely show that charitable giving is largely resilient over the long run. Most recessions have had only a short-term impact on donations, often with a lag between recessionary conditions and a decline in philanthropic gifts.

The short-term impact of recessions and bear markets is more severe. The Great Recession (2008-2009) saw overall charitable giving decline by 7% and 6.2% during those two years. Nonprofits with $50,000 or more in annual development revenue were largely safe. The closure rate of nonprofits in 2009, the second year of the recession, increased by just 0.7% compared to the 4.3% failure rate for nonprofits in 2007. Those figures exclude first-year nonprofits, which have a roughly 30% failure rate.

More Good News Than Bad

In general, nonprofits benefit more in periods of market growth than they suffer during economic downturns. Businesses are more likely to use tax deductions to adjust their tax burdens at year-end and tend to have more discretionary funds to invest in their community.

Nonprofits need to hold financial reserves deep enough to survive the short-term impact of substantial economic turbulence. Along with strong small business and corporate relationships and a robust network of monthly donors, nonprofits owe it to their staff, donors, and communities to maintain a “rainy day” fund to weather market cycle dips.

Support Your Favorite Causes

Organizations like Norte Youth Cycling depend on a wide network of generous donors. Consider making a monthly donation or sponsoring events or programs that align with your household or organizational values, and learn more about the financial health of your nonprofit partners. Questions about giving? Contact our Development Director, Wes Sovis, to learn more.