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The Economy: Don't Panic...But Don't Ignore Warning Signs!

Mark Cuban is credited with having said, “everybody’s a genius in a bull market.” That includes nonprofit development directors looked brilliant as they hit fundraising goals while the market continued to rise. Now, as we watch the market teeter, nonprofits should be on high alert for what this could do to their 2022 revenue. How much the economy will impact them depends on the next couple of months and whether we see a market crash or a full recession.

A ten percent drop in stock prices is considered a correction and, as of January 25th, the S&P 500 was down just shy of 10%, with some analysts predicting slow growth in the markets for the foreseeable future. Every market drop is different, but the people who study philanthropy trends say the health of the stock market is tied to fundraising. A 2012 study by economics professors at the University of Chicago found a direct correlation between boom-and-bust markets and charitable giving. Educational nonprofits were especially tied to the markets. The good news from their study was that donations don't go down as much in a bear market as they go up in a bull market.

In fact, market corrections tend to slow the growth of charitable giving, but they have never resulted in an overall decline in giving. instead, they slow the growth of annual fundraising amounts. In other words, total charitable giving increases; it just doesn’t increase by as much during bad markets.

Source: FactSet® Research Systems Inc., Giving USA 2020: The Annual Report on Philanthropy for the Year 2019. Researched and written by Indiana University Lilly Family School of Philanthropy.

However, if the country slips into a recession, charities need to be very concerned. The evidence there is clear. At the time when nonprofits are needed the most, people are less generous. In the recession of 2008, giving actually went down by 15% over a two year period.

Why is a market drop different from a recession? Because the market is not the economy. A falling market may make people nervous and have the psychological effect of causing people to be cautious about giving too much. However, most people live off their paychecks, not investments, and that is not tied to the market's rise or fall. A market drop may impact larger donors, especially retirees, but even then, their investments are likely to be spread out over a number of financial vehicles so they are less impacted by falling stock market prices.

In the case of a recession through, everyone suffers. Donations are very closely tied to after-tax income and when people are worried about that income drying up, donations go down.

So, what is a nonprofit to do?

  1. Recognize this may be a lesson in humility. In the words of Warren Buffet’s business partner, Charlie Munger, “Bull markets go to people’s heads. If you’re a duck on a pond, and it’s rising due to a downpour, you start going up in the world. But you think it’s you, not the pond.” Don't be surprised if fundraising in 2022 is a lot harder than in 2021 and plan accordingly.

  2. Do an internal stress test. Look at where your funding comes from and map out what you would do if large donations dropped by 10%. What about grants? How would you respond if a corporate supporter is sensitive to a drop in its share price and suspends its giving program? How could you make that up?

  3. Most importantly, communicate! Let your donors know what you are doing. Let them know why your cause is critical in a downturn. Approach your communications on two tracks:

    • Stewardship for existing donors – Personal outreach and genuine sympathy if a downturn is causing them pain.

    • Donor acquisition for new supporters – If you were to lose a percentage of your donations from existing donors, the only way to make it up is to bring new people into the tent. This is especially true if the market drops but the country avoids a recession. Then it is likely to be your mid-tier donors that carry you until the market rebounds.

This is not a time to panic, but it is time to be concerned and to prepare. And like a duck on a pond, paddle a little bit faster!


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