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There has been much talk of recession in the UK and US since 2020. The economy, however, has remained resilient; refusing to buckle completely.
But as we enter the second quarter of 2023, analysts are now seeing a slowing down of activity. Plus, there’s an increase in unemployment and declining business investments.
So, it’s likely that a recession will hit this year.
Recession always has a major impact on investors and the stock market. People are more likely to invest in stocks and other investments when the economy is doing well. But when things start to go wrong, knowing what to do with your money can be difficult
During times of recession, investors suffer as stock prices fall. Bonds become less attractive than traditional safe-havens like cash. Other assets may also drop in value.
But, it’s not all doom and gloom.
It’s important to understand that recessions don’t last forever. It’s a historical fact that recessions never last more than two years. Also, many investors learn to thrive in a recession.
That may seem absurd, but read on, and all will become clear!
Market volatility and how it affects investment decisions
Market volatility is when stock prices explode or implode over a short period of time.
It’s during recessions, that markets tend to be more volatile. That’s because there is greater uncertainty about the future. Investment decisions can thus become more challenging. Predicting price movements becomes harder.
You may find some investors rushing to sell stocks they believe may lose further value.
History of past recessions and their impact on the market
Recessions have occurred throughout history. But we have learned an awful lot from them so we can make better decisions today.
The exact cause may vary from one recession to another, but the following usually play a part:
- High levels of debt
- Supply and demand imbalances
- Over-investing in certain sectors
- Slowdown of consumer spending
- Perceptions of economic or political instability
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Historical recessions include:
Great Depression (1929-1933):
By far the most “famous” and devastating. This was a time of dramatic economic decline in many countries around the world. Unemployment was huge. Poverty was widespread.
Recession of 1973-75:
This recession started in the U.S., but it soon spread to other countries. It caused inflation to rise and unemployment also increased.
Japan’s Lost Decade (1991-2001):
The result of a combination of factors. The bursting of a real estate asset bubble and an overvalued currency.
Great Recession (2007-09):
This recession began in the U.S. It soon spread to other countries around the world. It caused stock markets to plunge, home prices to fall, and unemployment to skyrocket.
COVID-19 Recession (2020-present):
There is some debate about how deep this recession was. No doubt economies around the world went into a fast tailspin. There was soaring unemployment rates, crashing stock markets and widespread business closures. However, the economy quickly rallied. Some enterprises actually excelled.
Advice on investing during a recession
When investing during a recession, remember that timing the market isn’t a good strategy.
It can be tempting to sell when the market goes down and buy when it goes up, but this doesn’t always work out as expected.
Staying invested for the long term is generally better, as time helps smooth out some of the volatility.
In fact, as mentioned in the introduction, you can actually use a recession to your advantage.
Importance of a well-diversified portfolio
A well-diversified investment portfolio is one of the best ways to protect your money. It also ensures a secure financial future.
So what exactly does “diversification” mean?
Basically, it means spreading out your investments across different types of asset classes. Because when one area performs poorly, others may do better. This helps offset any losses.
For example, stocks might be doing badly, while bonds are performing well. Having both types in your portfolio helps balance things out.
When creating an investment portfolio, it’s important to consider your goals.
It’s also important to keep track of the performance of each asset class in your portfolio. This ensures it has balance according to your goals. It also makes sure no single asset class gets too large or small and keeps risk at an acceptable level.
Diversification is key when it comes to investing and should be part of any sound financial plan. That’s because it helps reduce risks and ensures you’re financial future is on the right track.
Staying invested and avoiding market timing
Market timing is when you try to predict when the markets are going up or down. Then make changes to your investments.
While it may be tempting to try and time the market by selling off stocks when markets are low, this can backfire. That’s because stock prices can rebound before you have a chance to buy back in. That means missed opportunities. And no one wants those!
Instead of trying your luck with timing the market, you should stay invested. It’s like playing a game: even if you don’t win all the time, if you play long enough, you’ll come out on top.
Another great way to avoid market timing is by diversifying your investments.
That means investing in different kinds of stocks, bonds, mutual funds, among others. This helps spread out the risk so you’re not relying on one type of investment only to make money.
Opportunities for investment in recession-resistant sectors
Now we get to the best part! When it comes to investing, some companies fare better during recessions than others. These we call “recession-resistant” sectors.
These are sectors that deal in all essential items that people need even when times get tough. Thus, companies within these industries tend to hold their value during economic downturns. They can even prosper.
Let’s take a closer look at each sector:
Food: People need food no matter what—even if money is tight. That’s why companies that produce or supply food products are recession-resistant. Examples include grocery stores, restaurants, and packaged food companies.
Healthcare: Companies providing medical services and equipment, pharmaceuticals, and insurance. All these are essential during an economic downturn.
Utilities: Companies in this space provide electricity, gas, water, waste management services. Plus communications services such as internet access.
Consumer goods: People need toiletries/clothing/household goods/ electronics etc. pretty often. They tend to remain in demand even during a recession.
Importance of seeking professional financial advice
If you don’t feel comfortable making investment decisions on your own, don’t. Seek professional advice instead. A trained financial advisor can help guide you.
Conclusion and summary of key points
In conclusion, recessions can have a major impact on investors and the stock market. You can avoid the heartache easily by:
having a well-diversified portfolio
avoiding market timing and
seeking professional advice
It can also maximise your returns over the long term.
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