Recessions are often feared and heavily talked about since the Global Financial Crisis. They are associated with a fall in Economic activity and with that comes many negative effects including increases in unemployment, reduced income and spending and falling stock markets.
So what is a recession and what does it mean for investing?
The most widely recognised definition of a recession is a decline in Economic activity for two consecutive quarters. The decline in Economic activity is measured by the Gross Domestic Product or GDP. The GDP measures the value of outputs of a Country – taking into account things like Household Spending and Net Exports.
Recessions can last for years or as little as months. Stock markets tend to react incredibly negatively or ‘bottom-out’ at the start of a Recession but tend to rise as despair turns to optimism of a recovery. Certain shares will also ‘do well’ in a Recession and could see their prices increase. For example, utilities and food retailers will arguably remain a constant despite the Economic hardship as people will still need to consume the associated services and goods.
Although the impact of a recession cannot be taken lightly and there are many knock-on effects. Businesses struggling will make workers redundant, incomes will be lost, loans cannot be repaid and the lenders can suffer from irrecoverable debts. So across business, people and banking – a recession can cause catastrophic damage.
As an Investor, the challenge is to look through the noise, keep calm and try to spot opportunities in and among all the pessimism. For the ever-alert Investor, there are certain great opportunities to be found.