When central bankers met for the Jackson Hole Economic Symposium in 2022, the goal was to tame persistent inflation. One year later, despite a slight victory against price increase, central bankers maintained their hawkish tone. Jerome Powell said in 2023, “Although inflation has moved down from its peak—a welcome development—it remains too high.” In this context, many bright minds in the field of economics predict that the U.S. economy and most developed countries will soon go through a major recession. Interest rate hikes in an attempt to cool inflation have been viewed as the breaker of the economic cycle. Historically speaking, since 1950, 16 recessions that have occurred were due to a rapid increase in interest rates (source: managing disinflation). But what exactly is a recession, and how should wise investors behave during this critical time?
A recession is a painful economic period that haunts both policymakers and the government of any nation. In brief, it is simply a decline in the GDP for two or more consecutive quarters. This economic cycle is accompanied by a rise in unemployment, a reduction in wages, and a decline in or collapse of businesses. Just like death, recession is unavoidable. The positive side to this is that good economic policy can alleviate recession, just as adopting a healthy lifestyle can expand one’s life expectancy.
Recession is often associated with the bear market. Although the two phenomena are different, they frequently coincide; turmoil in the stock market often accompanies a decline in economic output. Since the 1900s, recessions in the U.S. have occurred during a bear market 70% of the time. This substantial correlation between a slump in the stock market and a nightmarish economic period reinforces the negative perception of recession.
The dominant idea at the beginning of 2023 was that all major economies would experience a recession. The yield curve started to invert in 2022, while bond yields – an indicator of economic health – soared throughout 2022 and 2023. During August 2023, the U.S.’s 30-year yield reached 4.42%, while the 10-year yield hit 4.33%. The tightening monetary sparked by central bankers has fortified the idea that a recession is just around the corner. In general, in the face of destructive inflation, central bankers make a tradeoff between inflation and economic growth. In the 1970s, during the great inflation era, U.S. policymakers chose to sacrifice economic expansion in order to achieve price stability. The cost of this disinflation, managed by Volcker, led to a loss of 20% in the U.S. GDP.
Volcker, led to a loss of 20% in the U.S. GDP.
In this context, the data that revived hope of a soft landing during the second quarter of 2022 was a boon for U.S. policymakers[CG1] . Driven mainly by strong business investments and consumer spending, the economy grew at an annual pace of 2.4%. Globally, the perspective currently looks promising; Britain’s core inflation decreased to 6.2% in August, and the Japanese economy grew to an annual pace of 4.8%. Despite concerns related to China’s housing market and economic model, the world economy is demonstrating sharp resilience in the face of high interest rates.
The narrative of recession has shifted, but investors must be emotionally equipped during this time of economic strife. The threat of recession has driven back many investors, but this view must change. The market is a patience game, and the winners are those who honor the struggle. Analyzed through this lens, a recession is a golden period, as market loss can actually be beneficial. In fact, it creates fertile ground for bargain hunters. Over the last two decades, seven out of the 10 best days in the market occurred during the worst days of the market, and disinvesting during this time can have a harmful effect on investor portfolios. Time is nonrefundable, and investors must master their fears of not disinvesting during this vital time for the growth of their portfolios. As Napoleon Bonaparte once said, “The greatest danger occurs at the moment of victory.”
The greatest sin an investor can commit is to disinvest during a recession – a ‘Goldilocks’ time to make a fortune. As a diehard fan of Liverpool F.C., I can draw an analogy between recession and counter-pressing. Jesse March said that “losing the ball is an opportunity.” Despite the seemingly counterintuitive idea, not permanently having the ball creates an opportunity through counterattack to crush an opponent who is solely focused on constructing their new phase of attack. In the same way, when market prices decline, use the opportunity to buy your assets cheaply and sell high to generate significant profits that would not otherwise exist in a market that was permanently on the rise. Finally, I can’t help but conclude this article on the hidden benefits of recession without quoting Rupal. J Bhansali: “Investors want to avoid pain at all costs, but successful investing often entails taking short-
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