Since February 2022, google searches for ‘recession’ have increased by a multiple of four. It is not difficult to imagine, given the negativity surrounding major news headlines these days. So, the question becomes; is a recession imminent? First, it’s important to understand what constitutes a recession. Technically, a recession can be defined as two consecutive quarters of declining GDP, which is also a result of increasing unemployment, and lower economic output. Although hundreds of indicators help determine where we are in an economic cycle, it’s next to impossible to predict and time the next recession with certainty. We typically don’t know that we’re in a recession until after the fact. However, this doesn’t mean there aren’t methods of managing your way through this part of the business cycle, so it’s worth noting historical recessions and what has led many to think we are headed for another.
Mark Twain was quoted saying, “history never repeats itself, but often rhymes,” which is all too true in the financial markets. Recent recessions have shown us that although the causes may have differed, many aspects were similar in nature, such as market contractions, negative news headlines, and overall fear. The year 2000 was a period of pure euphoria where fake internet companies went public during the tech boom, only to be wiped out after realizing they couldn’t go up forever. While 2008 was considered the second-worst crisis since the great depression and was caused by extremely loose lending standards. However, the most recent and shortest recession on record, 2020, resulted from a pandemic that shut down the world economy. The current worry is that inflation has gotten out of hand, and the only method to control prices is to raise interest rates. As prices increase, consumers are less willing to spend, and rising rates result in a reluctance to borrow which could put the economy into a recession.
There are a lot of negative connotations behind the word recession, but there are some silver linings that come from it. Considering it is a natural part of the economic cycle, recessions essentially reset the system and provide the opportunity for more efficiencies going forward. Recessions can also help prevent the economy from spinning into a depression which can have a much longer-lasting impact. On average, recessions occur every six years and last approximately 11 months , which is an extremely short time frame in the investing world but can feel like an eternity when watching your own money move up and down in the markets.
Every recession has been different in one way or another, but they all eventually ended and were followed up by a bull market. Instead of trying to time the economy and avoid a recession altogether (which could have alternate consequences), it’s best to revaluate your situation and move forward from there. From an investing standpoint, you should ensure you are properly diversified across various asset classes and positions within those asset classes. The start of 2022 has been interesting in the sense that both equities and bonds are in negative territory. In contrast, historically, they have provided diversification benefits (i.e., one goes down, the other goes up, to provide a cushion). Therefore, it is essential to look further at other asset classes such as farmland, infrastructure, private debt, and private equity for broader diversification. It is also equally important to consider the emotional drivers during a recessionary period, such as herd mentality, which takes over in both up and down markets.
Psychologically, investing is much easier when things are rosy, and markets are trending upward. In contrast, it is the opposite when we become bombarded with negative news and markets are in a downward trend. Logically, however, would you rather buy something at a lower price or wait until conditions ‘return to normal’, at which point you’re paying a premium. The psychological aspect creates a negative feedback loop, where you think the markets have nowhere to go but down. Therefore, it’s important to look back on history and be patient throughout the process, knowing that this is a normal and healthy part of an economic cycle. It’s also where you can get tremendous value from speaking to someone such as an advisor and help serve as a rational hand.
So, are we headed for another recession? Quite possibly, considering all the available data, but that doesn’t mean it’s time to sell and hide. Markets may have already factored this in, so you miss out on the upside by selling. It’s also important to keep in mind that all previous recessions have come to an end – it’s not about timing the market but rather time spent in the market. If you’re interested in learning more about diversifying your portfolio, please reach out to one of our Wealth Counsellors.