Are We Heading For Recession? Here’s How It Will Affect Investors

Economist Julius Shiskin identified a few rules of thumb in defining a recession, the most popular rule being two consecutive quarters with a falling GDP. From another perspective, the National Bureau of Economic Research (NBER) defines a recession as “A significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.”

Based on history, we have learned that recessions can happen for many reasons but they are rooted in the built-up imbalances in the economy that need correction such as rising interest rates, inflation, and commodity prices.

The economy is down or struggling, people lose jobs, company sales go down and the country’s economic output declines. There have been 14 recessions in the United States since 1937 (including the Coronavirus recession) and while we cannot predict if a recession is coming with accuracy and consistency, history can give us an idea about the factors that cause a recession. One thing is for certain though, and as long-term investors, we must remember. Keep your eye on the distant horizon because recessions ALWAYS end. Even the greatest recession in the history of economics ended in a few years and subsequent years saw complete revival and growth.

There are a lot of ways in which a recession can start. While it can be hard to predict it accurately, we can look into the main drivers of a recession to gauge the possibility of it happening. Here are some of the causes of recession:

• Economic shocks
• Excessive debt
• Asset bubbles
• Too much inflation
• Too much deflation
• Technological change and advancements

A recession can last for months or a few years. U.S. Recessions from 1945 to 2009 lasted for 11 months on average, with the shortest being the Coronavirus recession which ended on April 2022.

It is important to be ready and be able to prepare in case a recession happens. While we cannot be certain about economic forecasts, the following indicators help you anticipate an upcoming recession:

• Inverted yield curve
• Declining consumer confidence
• Drop in the Leading Economic Index (LEI)
• Sudden decline of the stock market
• Rising unemployment

A global recession happens when synchronized recessions occur in many national economies due to economic shocks and impacts of recession from one country to another. This results in a long period of economic decline all over the world. With the recent global crisis, economists say that a global recession is not expected. However, higher costs and slower growth are seen.

How does a recession affect investments and stocks? You can lose money in your investments in stocks, bonds, real estate, and other assets during a recession. If you are thinking of making stock market investments, it can be risky during a recession due to the stock market crashing. However, do not be disheartened because pulling back your investments when the economy is down is not the only answer.

You can continue your Dollar-Cost Averaging (DCA), rebalance your holdings, or hold your stocks and equity mutual funds if you are anticipating short-term market changes. Do your research to learn and understand how investments perform. Learn how to compare the gains and risks of buying stocks during a decline. The bottom of a recession is also a buying opportunity. Increase your holdings in long-term stocks which you will be able to obtain for much lower rates now.

While we can learn from how investments perform in past recessions, we cannot make short-term predictions on what will happen in the market. Hence, it can be a good idea to stick to your investment strategy even when the market is declining so you can take part in its recovery. Another thing that we can pick up from past recessions is that recessions do not last forever. Markets and economies recover from drastic downturns and sometimes emerge even stronger later on.