What to Expect from a Recession

Recently, you may have seen talks of a looming recession in news cycles. Is a recession actually a possibility for the near future? It may not be so cut and dry as some may think. So, what is a recession, are we really heading toward one, and how can you prepare as an investor?

What is a Recession?

Recession is defined as an extended period of significant negative economic growth. The concept of a recession is complex, and many factors are involved in determining the state of the economy. While a recession may technically only last a short period of time, the effects can ripple for years. While certain measures can be used to attempt to predict forthcoming recessions, there is no clear way to know exactly when one might be coming. A few things that can lead to a recession include surging economic costs, consumer debt, inflation, and downturns in the stock market. While this is not a definitive list, these factors, alongside others, can contribute to the downfall of the GDP, and leave the economy in a recession.

A Brief History of Recessions in the US

The NBER, or the National Bureau of Economic Research, has the official word on what qualifies as a recession. According to them, the US has seen five recessions since 1980—most notably, the recession following the 2008 financial crisis and the recession that took place in the early days of the COVID-19 pandemic.

The former of the two, known as the Great Recession, lasted for a year and a half after the housing market bust and was the most damaging since the Great Depression. Unemployment reached 10%, the median income was hit, and the Dow Jones fell over 50%. In response, new fiscal policies were put in place to help the economy bounce back, and ideally prevent a similar situation from recurring.

The most recent recession differed in several ways. 2020 was a difficult year for many reasons, and the beginning of the pandemic took a huge toll on the economy. However, the recession only lasted two months, and while the impact was significant, the economy was able to recover faster than in 2008 due to the nature of the downturn. Government efforts to promote stimulus care were effective in preventing a prolonged recession period. Although, record-high unemployment rates still took a toll on the average worker, which took longer to recover from.

How Investors Can Prepare

One way that recessions can be predicted is by watching out for an inverted yield curve. This type of curve, when seen across multiple investment products, can happen when short-term interest rates are higher than long-term interest rates, denoting a negative economic outlook based on how consumers are choosing to invest. The past ten recessions have been predicted this way, but it's important to note that not every inverted yield curve is followed by a recession. With this in mind, it can be a good indicator to prepare your portfolio.

While there is no fool-proof way to prevent loss when it comes to investing, especially during difficult economic times, you can prepare for the hit, and develop a strategy to regain your footing. Whether a recession is coming or not, you should always keep up with your investing plan, risk tolerance, and outlook to make sure you are staying on track with your goals and making smart investment decisions. It's important to know that the market is unpredictable and will constantly fluctuate, so losses are to be expected—so don't use this as an excuse to emotionally invest, as it can cause further losses. One of the best things you can do as an investor is remain calm during an economic downturn and stay up to date with the regular changes in the stock market to determine what move to make next. Investing isn't easy, but when you're prepared, it can work out in your favor, even during a recession.

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