What Is A Recession?

Rumblings of a recession are creeping into the market as investors prepare for the worst in the midst of COVID-19 panic

Not too long ago we were all prancing along happily with our lives, blissfully unaware that the longest bull market in history was about to come crashing down under the weight of a deadly pandemic. ‘Meme stocks’ were all the rage, as investors dove headlong into speculative investments such as Virgin Galactic (NYSE: SPCE), Beyond Meat (NASDAQ: BYND), and even Tesla (NASDAQ: TSLA). 

There were many investors, of course, who dared to ask the blasphemous question:

When is the next recession?

Well, it may well be here now. The bear market is here, the Dow Jones (INDEXDJX: .DJI) is up and down like a rollercoaster, while the S&P 500 (NYSEARCA: VOO) has had 2019’s gains all-but wiped away between February and March 2020. Circuit breakers are becoming a regular occurrence, and some analysts are starting to believe that we are still far from hitting the bottom, as a recession looms large. 

This begs the question for many investors, especially those who have not lived through one: 

What is a recession and how might it affect your portfolio?

What is a recession? 

Investopedia defines a recession as: 

A significant decline in general economic activity in a designated region, typically recognized as two consecutive quarters of economic decline in a country’s GDP.

It sounds a bit more straightforward when put like that, but the specter of the 2008 economic crash has turned ‘recession’ into a taboo word. It’s important to understand that recessions are an inevitable part of economics. There have been an estimated 47 recessions since the formation of the United States, which averages to one every five years. Some you will know about, such as 2008, others you may not have ever heard of, such as the recession of 1949.

What causes a recession?

Any number of causes can be responsible for an economy falling into recession. As of March 2020, we are on track for a recession caused by the global COVID-19 pandemic, although it is early days yet. 

In 2008, much of the blame for the Great Recession fell on the housing bubble in the U.S., as prices skyrocketed for years and then suddenly fell. The Great Depression of 1929 can trace blame back to the stock market crash that occurred on Black Tuesday, October 29, 1929. 

There are several common factors that can be traced back to almost every recession in modern history though. These include: 

  • High interest rates which limits the amount of money available to invest. 
  • Inflation of the cost of products and goods, leading to a slowdown in spending. 
  • Reduced real wages of workers, whose paychecks are not adjusted to match inflation, resulting in less disposable income. 
  • A decline in Gross Domestic Product (GDP), meaning the market value of all goods and services produced within a country declines over time. 

Are we headed towards another recession?

As things stand, a betting man would have his money on another recession occurring sooner rather than later, but it is impossible to say for certain. The U.S. Senate and The White House agreed a $2 trillion stimulus package to boost the economy on March 25. 

This could alleviate some pressure on affected companies such as Boeing (NYSE: BA) and Delta Airlines (NYSE: DAL). However, it will not necessarily solve the problem of people not spending their money, as they are forced to self-isolate due to the coronavirus, not to mention a complete halt in production. 

How to survive the next recession

The golden rules to surviving a recession are the same as the rules for creating long term wealth in the stock market:

  1. Think long term
  2. Buy what you believe in
  3. Never borrow to buy
  4. Diversify
  5. Invest what you can, when you can

If you are using a long-term investment strategy, then brief downturns in the market such as this should not affect your overall wealth appreciation plan. The likes of industry titans Apple (NASDAQ: AAPL), Amazon (NASDAQ: AMZN), and Microsoft (NASDAQ: MSFT) did not become different companies just because the market took a turn, and should still be worth an investment if it’s something you believe in.

There are 3 stocks I would invest in during a recession, maybe you have your own list of stocks you’d love to get at a lower price?

As our head analyst Rory loves to say, “If you like a business at $50, you should love it at $40.”

What happens in a recession?

In a recession, the GDP of an economy declines due to a reduction in spending or other factors.

When was the last recession?

According to the U.S. National Bureau of Economic Research, the last recession occurred between December 2007 and June 2009.

Will there be a recession in 2020?

As things stand, a global recession caused by the coronavirus is beginning to look inevitable in 2020.

MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in companies mentioned above. Read our full disclosure policy here.