The world economy is predicted to face a recession in 2023, following the current inflation crisis. This will result in a brief period of shrinking economic growth, with interest rate hikes or reductions expected to come to a halt.
However, there’s no reason to panic. In fact, some investors are welcoming the predicted recession as an opportunity to build lasting wealth.
The Basics of Recession
A recession is considered one of the most significant events in the world of finance and economics. It’s a widespread economic downturn that affects multiple industries and results in lower economic activity, measured by a decrease in GDP. The GDP is a widely used metric that calculates the total market value of goods and services produced within a country’s borders. When the GDP drops for two consecutive quarters, it’s considered a recession. The downturn of the economy often leads to job losses and a tight job market, as well as a declining stock market. During this time, many investors feel afraid and tend to sell their stocks, leading to further market instability.
However, for long-term investors who have a horizon of 10 years or more, a recession can be an opportunity to build wealth. A diverse portfolio of stocks or a passive index fund is a low-risk investment that has the potential to yield substantial returns over time. The risk of losing money decreases with an increased investment time horizon. Long-term investing through a buy-and-hold strategy, rather than short-term stock trading, can help investors navigate the ups and downs of the market, weathering the challenges of a recession and building lasting wealth.
It’s crucial to understand that recessions are a normal part of the economic cycle, and their impact on the economy is temporary. With the right preparation and mindset, investors can weather the economic downturn and come out on the other side with even more financial stability.
The Reaction of Wall Street To The Economic Recession
Wall Street’s reaction to economic recessions is a crucial aspect of the financial world. Recessions are an inevitable part of the multi-year economic cycle, and the stock market’s reaction to these events can have a significant impact on the economy.
In general, the stock market moves in cycles, with overvalued stocks leading to a correction as investors become cautious and start selling, causing a decline in stock prices. This correction is not only a result of sensible selling but also due to overzealous selling, which exacerbates the decline in prices.
However, the downturn also leads to undervalued stocks and a new buying opportunity for investors. While drops in stock prices during recessions are normal, the general market trend moves upward in the long run, as the economy starts to recover from the recession. According to the National Bureau of Economic Research, typical economic downturns in the US since World War II have lasted around 10 months, with the shortest being two months and the longest being 18 months. However, these periods of contraction eventually give way to expansionary periods that tend to last much longer, providing a new growth opportunity for the economy and for investors.
Don’t Worry Too Much
Three key ideas to keep in mind during a recession are: the market crash of 2022 was a correction and stocks are comfortably priced now; negative GDP growth is a temporary dip in the road to sustained economic growth, with strong businesses surviving and weaker ones being weeded out; and the COVID-19 crisis brought to light and amplified economic issues, but they are being addressed, and process improvements will remain after the pandemic challenges fade away. Now might be a good time to invest in the stock market and prepare for the upcoming recession.
New Opportunities
Investing during a market crash can be a missed opportunity, however, the current economic situation is expected to recover in a year or two and lead to a fresh bull market. It is suggested to invest in companies with strong financials and a clear path to growth, such as Roku and Amazon. Historically, the S&P 500 index has had a 362% total return since the 2008 crash, including a 41% drop at the beginning. Rather than being concerned about the approaching recession, taking advantage of buying strong sector leaders is advised.
So, while recessions are an inevitable part of the multi-year economic cycle, by understanding them and preparing, one can weather the challenges and build lasting wealth.
