What to Do if a Recession Finally Comes
Key Takeaways
The recession forecasted for 2023 has not materialised. As such, these worries have been pushed to 2024 instead.
Recession announcements tend to be extremely late; by the time they are called, the stock market would already have bottomed and is on its way to recovery. In addition, data shows that equities have a history of positive performance following a recession’s onset.
3 helpful ways to prepare for an oncoming recession (instead of exiting in fear) is to get an overview of your finances, reduce large liabilities, and possibly even have some extra savings set aside for potential opportunistic investments.
Recession is when your neighbor loses his job. Depression is when you lose yours.
— Ronald Reagan
Many predictions at the beginning of 2023 centred on the expected recession and its impact to asset markets. As we approach the end of the year with no sign of the dreaded recession yet, recent headlines point to strategists and financial media implying that the recession may occur next year instead.
The risk of a recession remains generally high, says Barclays’ Venu Krishna
Risk outlook 2024: continued high interest rates could lead to global recession
With such worrisome news, you may be tempted to abandon equities and go to cash or safer assets. But a study of history shows that stock prices incorporate these expectations in advance and generally fall in value before a recession even begins. This is also because recession announcements are very delayed — the table below shows by the time a recession is called, the stock market would already have bottomed and is on its way to recovery. In some instances, the announcement was made half a year after the market bottom.
Across the two years that follow a recession’s onset, equities have a history of positive performance. Data covering the past century’s 16 US recessions (which has the longest history) show that investors tended to be rewarded for sticking with stocks. In 12 of the 16 instances (75% of the time) returns on stocks were positive two years after a recession began (chart below). The average annualised market return for the two years following a recession’s start was 8.8%.
Of course investors do not emerge from every recession unscathed, with occasions such as the great depression of 1929, recession of the great depression of 1937, dot-com bubble of 2001, and global financial crisis of 2008.
But instead of meddling with your existing asset allocation, there are better and more practical ways to prepare for a recession.
“Health-check” Your Finances.
Whether or not a recession affects you is probably down to whether you still are holding on to a job. Even if you are still working, there could be a hit in take-home income. As such, a quick check on expenses vs possible reduction in income is important to ensure that you are able to outlast any downturn.
Reduce Large Liabilities.
If you are worried about an upcoming recession, then it is probably a good time not to make any large purchases which involves debt - especially in the current environment where rates have risen to levels not seen in a long time.
Use Extra Savings for Opportunistic Investments
Investors who still have 10 years or more with respect to the end date of their goals have the ability to take more risks if the market comes down further as you have time to ride out the market volatility and have the fantastic opportunity to take advantage of depressed prices. After every decline, the market tends to bounce back, which boosts long-term returns over time.
During such a situation, Warren Buffett’s famous quote comes to mind - “Be fearful when others are greedy and greedy when others are fearful.”
Recessions understandably trigger worries over how markets might perform. But a history of positive average performance following a recession can be a comfort for investors wondering whether or not they should move out of stocks. Rather than change your well thought-out asset allocation from your investment plan at the wrong moment, there are more practical ways to prepare for a recession — whenever that may be.
If you have worries about the impact of recessions on your financial health, come and chat with us.
