The effect of Business Cycles on the financial life of the Money Smart Athlete

The effect of Business Cycles on the financial life of the Money Smart Athlete

History has proven that in the long term an economy can grow over time, that investments can earn returns, and that the value of currency can remain relatively stable. In the short term however, that is not continuously true. Unsettled periods can upset financial plans, especially if they last long enough or happen at just the wrong time in your life.

Systemic factors which include business cycles can have either a positive or a negative effect on your financial thinking and financial decisions.   A booming economy boasts optimism for the future and a feeling of well being along with an ‘anything-is-possible’ attitude.  Financial decisions are made with a positive and optimistic outlook.  A negative economy gives rise to feelings of despair and depression and financial decisions are made within this gloomy attitude.

Business Cycles

An economy’s output or productivity is measured by its gross domestic product or GDP, the value of what is produced in a period. When the GDP is increasing, the economy is in an expansion, and when it is decreasing, the economy is in a contraction. An economy that contracts for half a year is said to be in recession; a prolonged recession is a depression.

Over time, the economy tends to be cyclical, sometimes expanding and sometimes contracting. This is called the business cycle. Cycles occur because things change and they upset economic equilibrium. That is, events change the balance between supply and demand in the economy overall. There are many reasons that this could happen, but whatever the reasons, buyers and sellers react to this imbalance, which then creates a change.  Business cycles usually affect most industries, including the sports industry.

Even though it is difficult to imagine the sports industry suffering the same way that conventional industries do, the last economic downturn, less than a decade ago, had its toll on the sports industry as well.

For decades, the sports industry had been largely impervious to economic cycles.  No matter what the state of the economy, sports leagues were expanding, sports stadiums were built and sports sponsorships were soaring high.  During the last recession, which swept the United States first and then the remaining continents, things changed; sponsorships funds, match day attendance and match day spending declined.  Sports teams and leagues have become increasingly reliant on revenue from corporate sponsorships, advertising, luxury boxes and suites, and as a result they have suffered a considerable decline in their revenues during the last economic downturn.

Sports Salaries

The lower revenues of sports franchises and clubs have a direct, negative effect on player salaries.  In the United States leagues salary caps are set up as percentages of prior league revenues, so the overall player compensation is affected perhaps not in the short term but definitely in the long term.  Usually in times of a recession or a financial downturn sports franchises and clubs try to realign things in their favor and secure a profitable future.  Sports contract duration is usually shortened along and the values of such contracts are cautiously lowered!

Endorsement Revenue

Professional athletes may feel the pains of a recession in their endorsement deals as well.  Corporate sponsorships of sports professionals and endorsement revenue take a hard hit during a recession because corporate budgets and especially marketing budgets are squeezed.  Money Smart Athletes should be prepared for such a predicament and they should perhaps have their endorsement contracts insured so as to secure this source of income in the event their corporate sponsors terminate their endorsement contracts prematurely.

Investment Portfolios

A recession will most probably have a negative effect on your investment portfolio, at least in the short term.  Downward stock and real estate market corrections usually come with a recession.  At times like this you should remember that building wealth over time is all about taking the long view and not getting bogged down by short term losses.  Instead of focusing on the ups and downs of each individual investment, you should step back and look at the big picture.  With the help of your financial advisor you should evaluate your portfolio and implement appropriate strategies which will lead to an eventually balanced and profitable investment portfolio.

Economic storms are part of life and we all go through them.  When planning your financial life you should take into consideration the wider economy conditions and the conditions in the markets that make up the economy.  These markets exist in a dynamic economic environment and those environmental realities are part of sound financial planning.  Becoming familiar with the patterns of the economic environment will help you make sound financial decisions and thrive financially.

For more information and a discussion on how the cyclicality of the economy can affect the financial lives of athletes you may get in touch with us at athena@apc-sport.com

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